Corporate Governance Evolution

The theory of corporate governance allows shareholders to select a board of directors to set the broad goals for a company. The board then selects operating officers to carry out the specifics of these directives, while the operating officers manage the day-to-day life of the company trying to achieve the goals set by the directors.

In practice, however, emerging companies have been managed by the entrepreneur who started the company. That entrepreneur became the chief operating and executive officer because he or she was the sole or major shareholder, controlled the board and typically surrounded themselves with directors that accepted the entrepreneur's visions and strategic plans. If the company raised venture capital or institutional money, representatives of those investors joined the board as at least initial supporters of the business plan and direction.

If all goes well, companies grow to become successful small publicly held companies. Sometimes the model of 'management by entrepreneur' does not change in any fundamental manner. There are many reasons for this, such as: 'don't rock the boat if you are doing okay', 'it will cost too much to engage someone who can help',  'no one knows where to start looking',  'the entrepreneur is concerned about someone intruding in his territory'. As a result, many companies remain without strong independent boards.

Unfortunately, even large companies have been dominated by a strong CEO who has followed the small company model. Such domination can lead to an unwillingness to take a new look at how the business is being managed. Sometimes the consequences, as recently demonstrated, have been a blatant disregard for the rights of the shareholders. Recent highly publicized abuses led to the enactment of the Sarbanes-Oxley Act of 2002, to new proposed NASDAQ regulations, and to new proposed regulations by the New York Stock Exchange.

The effects of these changes is that all public companies will need entirely independent audit committees comprised of at least members and, in all likelihood, will require that a majority of directors be independent.

Back to Viewpoint