The History of Corporate Governance
Most people are surprised to discover that “democracy” as we understand it in Western societies first appeared in the meetings of company shareholders, and only later was adopted by our parliaments. Direct democracy in the true sense – where everyone has an opinion that counts – probably only functions well in small groups of people, whether a fishing village or indigenous tribe. It was a great thing when after many generations of serfdom European people rediscovered democracy in their shareholder meetings and directors’ boardrooms.
When the Puritan Pilgrims migrated from England to Cape Cod in 1620, for example, the King of England was virtually a dictator, even though there was a Parliament which the common people were represented. At that time, the English Parliament had not been convened since 1614, and would not sit again until the following year (1621). In other words, the King really didn’t need the Parliament’s advice on how to run the country.
In company meetings, however, the average “citizen”, that is, each shareholder, did have a right to speak and be heard. It wasn’t difficult for the Puritan Pilgrims to make the transition, conceptually, from running a company to running a colony. Indeed, in the early era of corporate history, many trading companies, like the East India Company, had their own armed forces, and controlled territories.
Before they disembarked from their ship the Mayflower, the adult males among the Puritan Pilgrims signed document called the “Mayflower Compact” in which they declared that they intended to establish a new colony, In the Compact, they agreed to the following:
[We] covenant and combine our selves together into a civil body politic, for our better ordering and preservation and furtherance of the ends aforesaid; and by virtue hereof to enact, constitute, and frame such just and equal laws, ordinances, acts, constitutions and offices, from time to time, as shall be thought most meet and convenient for the general good of the Colony, unto which we promise all due submission and obedience …
You can read the full text at the Pilgrim Hall Museum’s website. Of course, the Puritan Pilgrims didn’t bother asking the people who were already living in the location of the new colony what they thought of this idea. Also, their womenfolk didn’t seem to have an opinion on the subject that mattered, judging by the fact that no women signed the Compact. (Those who can’t learn from the past are doomed to repeat it, so, yes, it’s important to acknowledge these things.) Anyway, the point I’m making here is that, right from the beginning, the groups of people who formed companies accepted the interplay of rights and obligations that remain the core of corporate governance to this day, as well as the process of freely electing managers (directors) and rotating them in and out of office, which is quite different to the hereditary oligarchy that traditionally ruled England and most other countries at a national level.
The Elements of Corporate Governance
Unchanged, therefore, from the earliest days of the history of companies, we have today the same structures: the owners, namely the shareholders, who elect a group of managers, the directors, to carry out the operation of the business company. In every country that has companies, sets of rules have evolved to shape and organise this process in a sensible manner. For example, even though boards of directors are elected for a certain term, shareholders may call an extraordinary meeting and remove the directors they feel like doing so. Directors owe the company and the shareholders a very high duty of care and can be punished and deposed for breaching that duty, not only by the company but also by the state. As companies are “creatures of law”, meaning that a company exists only because the government allows it to exist, companies are regulated by the government, can commit crimes the same way as individual persons, can be ordered to pay fines, and are subject to taxes.
There is no doubt that the invention of the company, together with the development of banking, allowed many more people to participate in the creation and management of wealth than previously was the case. It is very difficult to imagine that the average person in most parts of the world today would have the same standard of living if companies were never created, together with the legal regimes that control what companies do.
If you are interested in the history of the company as an economic and legal unit, you may wish to read The Company: A Short History of a Revolutionary Idea (2005) by John Micklethwait and Adrian Wooldridge. Another interesting book is The First Knowledge Economy (2014) by Margaret C Jacob, which is about the economy of Europe in the period 1750-1850, and discusses how new ideas transformed society. The vehicle for the commercialised applications of new knowledge was, in many cases, then and now, some type of company.
[This blog post was written by James Irving, Australian commercial lawyer. Please visit the Irving Law website for more information about James and his practice, and for free legal information. This post is not intended as legal advice for any particular person. Photo credit: Stained glass window of the signing of the Mayflower Compact in the Plymouth Congregational Church, 1217 6th Avenue, Seattle, Washington, USA, by Joe Mabel, a public domain image courtesy of Wikimedia Commons and used here under a CC BY-SA 2.0 licence.]