Why corporate governance was slow to evolve
Corporate governance is a familiar phrase today, but its rise was surprisingly slow. Although the underlying ideas were understood as early as 1932, when Berle and Means described the separation of ownership and control, the term “corporate governance” itself did not take hold until the 1980s. For much of the twentieth century, management studies focused primarily on how to run companies, strategy, operations, marketing, and leadership, rather than on how power should be overseen or balanced inside firms. Oversight, fiduciary duty, and board accountability were seen as legal or political matters, not management challenges. Academic and professional priorities therefore concentrated on efficiency and growth rather than control, accountability, or the protection of stakeholder interests. This meant that although the concepts existed, the institutional structures and political will required to turn these ideas into a distinct field were missing until major scandals forced attention.
Another reason for the slow evolution was the fragmentation of legal and financial systems. Corporate law, accounting standards, securities regulation, and banking rules all evolved at different speeds and often with conflicting objectives. Governance problems that cut across these systems, such as off–balance sheet financing or related-party transactions, were difficult to address because coordinated reform was rare. In many countries, concentrated ownership, family businesses, large industrial groups, or bank-controlled companies, reduced pressure for formal governance frameworks since dominant owners could directly discipline managers. Where ownership was dispersed, small shareholders were often apathetic. Without strong investor activism or institutional investors pushing for reform, governance did not gain traction. Most importantly, there had been no wave of spectacular corporate scandals large enough to politicize governance failures. Only in the 1980s, when major collapses and market abuses emerged across the world, did the term “corporate governance” become mainstream, as academics, regulators, and journalists sought ways to understand and prevent such failures.
Many early failures illustrate why governance eventually became a central concern. In Australia, the collapses associated with Alan Bond, the Bell Group, Laurie Connell, and Rothwells revealed the dangers of concentrated executive power, extreme leverage, opaque financing structures, and overly close relationships between business and politics. The lack of independent oversight allowed charismatic leaders to expand recklessly until reality caught up and creditors were left exposed. In the United Kingdom, the Robert Maxwell scandal demonstrated how a powerful executive could override weak internal controls to divert pension assets for personal use. This collapse showed the need for independent audit committees, pension oversight, and checks on the influence of dominant CEOs. In the United States, the insider-trading scandals involving Ivan Boesky, Michael Milken, and Drexel Burnham Lambert exposed cultures built on excessive risk-taking, misaligned incentives, and poor compliance. Although regulations existed, firms lacked the internal governance strength needed to prevent misconduct. In Japan, the Recruit scandal revealed deep entanglements between corporations and political elites. Pre-IPO allocations of shares were used to buy favour, exposing the weaknesses of disclosure rules and the risks of political capture.
Would modern governance codes have prevented these collapses? They would certainly have reduced the likelihood. Requirements for board independence, audit committees, disclosure of related-party transactions, stronger insider-trading enforcement, and clearer fiduciary duties all address the failure mechanisms seen in these early scandals. However, governance codes only work when supported by enforcement, independent institutions, competent auditors, and investors who hold leaders to account. Without these, even the best regulatory frameworks can be circumvented.
Later failures in the 1990s and 2000s provide even clearer evidence of recurring governance weaknesses. Enron collapsed when executives hid debt in off-balance sheet entities, and auditors at Arthur Andersen failed to provide independent scrutiny. WorldCom inflated earnings by capitalizing routine expenses, a practice driven by pressure from senior management. Tyco’s leadership used corporate funds for personal benefits in a culture with weak board oversight. Parmalat fabricated assets and hid debt through opaque financial structures, while HIH Insurance in Australia engaged in under-reserving, risky acquisitions, and chronic mismanagement until insolvency became unavoidable. Marconi and other British firms failed after overoptimistic forecasts, weak audit quality, and aggressive accounting undermined credibility. Across these cases, the common thread is unmistakable: the failure of checks and balances. Misaligned incentives encouraged short-term manipulation, boards lacked independence or expertise, auditors became too close to management, and complex, opaque financial structures made it difficult for any outsider to detect wrongdoing.
The financial institutions that collapsed during the 2007,2009 global financial crisis demonstrated that governance failures were not limited to individual companies but could undermine entire financial systems. Institutions such as Lehman Brothers, Bear Stearns, Washington Mutual, and AIG suffered from excessive leverage, maturity mismatches, and a reliance on complex mortgage-backed securities that few board members truly understood. Compensation structures rewarded short-term volume rather than long-term risk management. Risk functions were often weak or subordinated to business units, and boards lacked the financial expertise needed to challenge executives. Regulators, fragmented across jurisdictions and constrained by outdated rules, failed to rein in systemic risk. The crisis revealed governance breakdowns at firm level, regulatory level, and system level.
The post-crisis reforms, stronger capital requirements, liquidity rules, independent risk committees, enhanced disclosure obligations, stress testing, and improved compensation design, were attempts to address these systemic failures. Yet they reaffirm a simple truth: governance is effective only when culture, incentives, oversight, and regulation align. When any one of these pillars fails, even sophisticated markets and powerful institutions can collapse.
The history of corporate governance can therefore be understood as a long-delayed response to recurring patterns of failure. The ideas were always known, but it took decades of scandals, collapses, and financial crises to force institutions to translate those ideas into practice. Corporate governance will continue to evolve because the underlying pressures, complex markets, powerful executives, aggressive incentives, and regulatory gaps, are permanent features of modern capitalism. The challenge is not simply creating stronger rules but fostering cultures and institutions capable of enforcing them.
