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Corporate Governance: An Overview

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Corporate governance is about who controls corporations and why. In the United States, the legal “who” is the owners of the corporation's common stock-the shareholders. However, the reality-even the legal reality-is much more complicated, and the “why” is to be found in historic American concerns about the connections between owner-ship, social responsibility, economic progress, and the role of markets in fostering a stable pluralistic democracy.

Initially, these concerns were focused on the role and responsibilities of the owners of business firms because the owners managed the firms themselves. However, with the emergence of large corporations, perhaps symbolized by the Standard Oil Trust in the late nineteenth century, Americans focused their attention on a new group of individuals: professional managers. Prior to the emergence of these corporations, managers and owners had been the same people, but now things were changing. Now wealthy and often absentee owners were hiring managers to run large, powerful companies, leading to a new set of questions. Among them were: Who were the managers to represent and why? What were the managers’ connections to the owners, and what, if any, were the social responsibilities of the managers and owners? Could the managers be trusted to carry out whatever economic and social objectives were entrusted to them? How could they be held accountable for their actions? And, how could they be controlled? In short, what was this beast that came to be called the modern corporation, who should control it, and how should it be controlled?

The modern corporation, a term coined by Adolf Berle and Gardiner Means, is a limited liability company (limited liability means that the owners are not personally liable for the debts or any other legal obligations of the firm) in which management is separated from ownership and corporate control falls into the hands of the managers. This separation of ownership from management and the resulting loss of direct owner involvement in the firm forced many people to rethink the conventional wisdom about the role of markets and the need for private ownership of capital in shaping the citizens’ sense of civic responsibility, preserving liberty, and ensuring economic progress. To explain why this occurred, we need to consider briefly two dominant historical theories about the importance of property ownership and markets for ensuring that Americans would live in a free society that promised equality and fairness for all: civic republicanism and nineteenth-century liberalism.
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Document Type: Research Article

Publication date: February 25, 2003

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