Corporate Governance in America

Abstract

This Essay describes the revolution in corporate governance that has occurred in the United States between 1950 and 2000. In 1950 the executive officers of large publicly held corporations controlled corporate activities while the role of the board of directors was largely passive. Its composition was essentially determined by the Chief Executive Officer. In 2000, boards of directors of publicly held corporations are composed primarily of independent directors selected by an independent committee. These boards have assumed significant oversight roles in many areas of corporate governance and the role of the Chief Executive Officer has been correspondingly reduced.

Four major factors contributed to this fundamental change in corporate governance: (1) The growth of institutional investors and their willingness to become involved in issues of corporate governance, (2) The scandals of the Nixon administration, (3) The development of takeover bids and their subsequent decline, and (4) The development of recommendations for improved corporate governance by a variety of respected organizations, including the Business Roundtable, the National Association of Corporate Directors, and the American Law Institute.

The traditional standard applied in econometric and finance studies evaluating changes in corporate governance is whether the changes increase the economic wealth of shareholders. Numerous studies fail to show that these changes have consistently had a positive effect on shareholder wealth, though one recent study suggests the contrary. This essay concludes by suggesting that the increased confidence in governance procedures establish the value of these changes irrespective of the inconclusive econometric and finance studies.