Is There Hope for Change? The Evolution of Conceptions of 'Good' Corporate Governance

Abstract

This Article examines the evolution of conceptions of “good” corporate governance that have successively revolutionized the corporate landscape. This Article shows that corporate decision making was influenced over the years by successive, rationalized ideals of good corporate governance. Changes in conceptions were precipitated by crises and environmental changes. They were reasoned, if often flawed, responses to complex macroeconomic forces, competitive conditions, regulations or the lack thereof, and other environmental factors. More importantly, they were reflections of the culture and thinking of the time, influenced by the views of successful business leaders, the business press, investors, and academics. This Article utilizes a broad definition of “conceptions of corporate governance.” It refers to managers’ perceptions of proper corporate purposes, strategies, and structures. It embraces managers’ perceptions of their environment and their ideals regarding such matters as their firm’s interactions with competitors, stakeholders, and the government. Thus, this approach broadens the use of the term “corporate governance,” based on agency theory, that arose during the 1980s focusing on the relationship between managers and shareholders. In earlier periods in U.S. business history, the central purpose of corporate governance was not to maximize stock prices, but to achieve growth, with survival and profit mainly as constraints. Managers adopted a variety of strategies that dominated the economic landscape, such as cartels, trusts, holding companies, vertical integration, and the unitary/functional, multidivisional, and conglomerate organizational forms. In the modern era managers have mainly adopted strategies to maximize shareholder value, including predominantly disaggregation and cost-cutting strategies. Like prior managerial strategies, they are not inevitable and have some negative consequences. These consequences include problematic managerial incentives, short-termism, the unsettling empowerment of short-term investors and financial firms, and adverse distributional consequences, discussed in this Article. As with prior eras, negative consequences are leading to changes. For instance, I see on the horizon the emergence of the sustainability conception of corporate governance. Rather than focusing solely on shareholders, managers with this emerging dominant conception would take a broader view of their role to consider as central to their business strategies the long-term societal value they create and the interests of all stakeholders. In Part II, I briefly examine the earlier conceptions of corporate governance to provide a background for understanding how corporate governance changes over time. Looking at changes in the past provides hope for change in the future. I then examine more recent finance conceptions of corporate governance in Part III — the portfolio and the shareholder value maximization conceptions. Additionally, in this Part, I argue that the shareholder value maximization conception that emerged in the late 1970s and 80s was improperly grounded mostly on claims of managerial self-interest in forming conglomerates in the 1960s and 70s. Finally, in Part IV I identify the adverse economic and social consequences of the shareholder value maximization conception of corporate governance. Having set the stage for change in the current era due to these adverse consequences, I present a new model of corporate governance — the sustainability conception — that I believe is emerging and will be supported by reforms that I propose. Part V concludes.