Evolution of Governance

Evolution of Governance

The word ‘governance’ appears to have been used since the Middle Ages. When Chaucer wrote The Canterbury Tales, the term was taken to mean “wise and responsible”. Historically, companies were both ‘governed’ and controlled by owners who pursued their economic goals and were responsible for the actions of their businesses. This is still the case in many organisations, especially small enterprises and family businesses. However, the roles and responsibilities expected of directors and owners is now different, even if this is not widely understood.

The modern company evolved when, for the first time, business enterprises were recognized as existing separately from their owners. Businesses that sought this separate existence were said to have ‘incorporated’ and were referred to as corporations. They became, in the eyes of the law, quasi-people.

With the emergence of incorporation came the concept of limited liability, that allowed companies to grow and assume risks that a single individual would not be able to manage. With limited liability, owners could invest capital in a company knowing that, at worst, they would lose their investments but not their others assets. Monastic communities and trade guilds were among the earliest beneficiaries of this concept of moving into business, secure in their knowledge that if their enterprise failed, they would not have to personally make restitution for any unpaid debts.

On 31 December 1600, a Royal Charter was granted to The Company of Merchants of London trading into the East Indies. The East India Company began with 218 members (shareholders). The company’s governance structure consisted of the General Court or Court of Proprietors and the Court of Directors. The former was made up of members with voting rights. The latter made up the executive body responsible for running the company, with its policy decisions requiring ratification by the Court of Proprietors. This is one of the first known examples of a board with a management oversight duty.

In the early 1900s, changes in the size and structure of organisations led to an effective separation between shareholders and the directors they elected. Management became more specialised; companies became more complex. As shareholder numbers grew too numerous to manage effectively, the role of directors grew and shareholders, ‘the owners’, ceded increasing amounts of power to boards.

Source: AICD