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Any book on responsible business practices must address standards of corporate governance. Do companies and their officers owe shareholders (their owners), certain duties of care and loyalty, as well as timely information and internal procedures? Do companies owe the broader investing public, and the public itself, disclosure and other specific duties? Do company officers and board members have specific duties to the company and its shareholders? The need for corporate governance standards arose with the first joint stock companies in the 1600s and 1700s, and the broad adoption of the principle of limited liability in the 1800s. When ownership and management were separated, it was appropriate to ask if hired managers and board members truly ran the company in the interest of the shareholder owners. With the growth in the 20th century of larger enterprises and multinational companies, standards became increasingly important to guide corporate behavior toward the welfare of investors, potential investors and the public at large. Today’s framework for corporate governance developed in the wake of the collapse of the U.S. stock market in 1929. The Securities Exchange Act of 1934 and additional laws adopted during the Depression established the U.S. Securities and Exchange Commission and pursued three objectives: to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation. Regular corporate financial reporting and timely disclosure were the primary requirements established by the SEC. It was the mid-1970s before significant pressure again arose in the U.S. for tightened standards of corporate governance. The bankruptcy in 1970 of the Penn Central Railway, which had diversified widely into other industries, focused attention both on conglomerates and on the behavior of boards. The SEC tightened standards regarding the falsification of corporate records, and prompted the New York Stock Exchange to require each listed company to have an audit committee of independent board members. Advocacy groups also pushed for nomination and compensation committees with only one managerial appointee and the appointment of board members who were not cronies of the CEO. While there was considerable attention to corporate governance at the federal level over this period, U.S. corporate governance was more closely regulated by state governments. In general corporations were incorporated and chartered by states. The State of Delaware became the most popular venue for business incorporation, given the state’s sophisticated courts and local availability of capable corporate governance lawyers. Approximately 2 million business entities were incorporated in Delaware (as of 2025), representing 68% of the Fortune 500. Delaware’s governance statutes were popular with companies, providing more privacy for financial records and expedited processes than most other states. Delaware regulations and court decisions dominated most discussion of corporate governance in the U.S. During the 1980s, an attempt to write a more robust federal governance code for companies was led by the American Law Institute. In the more conservative mood of the Reagan presidency, the ALI proposal, which called for more independent directors and mandatory audit and compensation committees, was opposed by most large companies. The proposal was watered down, and, when finally published in 1994, had little effect on corporate governance. The 1980s was also the beginning of the “deals” era, in which companies more frequently merged, split, went public, and then private again. Hostile takeovers became more common. Shareholder groups pushed for more governance regulation at the federal level without much success. Institutional Shareholder Services (ISS), an independent organization, was created by several business responsibility advocates to help shareholders assert their rights, in part by issuing recommendations to institutional investors on how to vote on contentious shareholder resolutions. Two events in the 2000s changed the governance landscape dramatically. In 2002 a significant number of financial scandals at large U.S. companies were revealed, involving such prominent companies as Enron, WorldCom, and HealthSouth. In response, the U.S. Congress adopted the Sarbanes Oxley Act of 2002 which imposed new requirements on chief executive officers, chief financial officers, and corporate general counsels. They were in effect mandated to be watchdogs over corporate financial fraud. Standards for due diligence by boards were also enhanced. The financial meltdown in corporate securities in 2008, which led to the bankruptcy of several of the largest financial institutions in the U.S. and, for a time, threatened to take down the world financial system, similarly led to major reform legislation. The Dodd Frank Act of 2010 sought to improve accountability and transparency in the financial system and protect consumers from abusive financial practices. It further enhanced standards of board oversight. Over the following decade of the 2010s, the topic of corporate governance drew great attention and led to the development of voluntary governance codes and measures of corporate governance behavior. Large institutional investors, led by BlackRock’s CEO Larry Fink, lobbied all companies to beef up their governance provisions and behavior. Among the multiple dimensions of business responsibility, responsible governance took on a much greater role than in previous decades. Some argued for the mandatory separation of the roles of board chair and company CEO; others for greater independence and diversity of board members. Delaware proceeded, carefully responding to these new concerns, seeking to encourage enhanced governance while remaining the state of choice for incorporation. California adopted laws mandating gender and racial diversity on boards for all companies operating in the state. Pressures also built for corporate boards to address a broader set of responsible business concerns. The term ESG emerged in 2004, shorthand for the environmental, social, and governance performance of the firm. Governance codes were written by several organizations, to define what good governance was, and to give companies a way to demonstrate their commitment to good governance by pledging to adhere to these voluntary codes. Among other concerns, several of these codes required boards to evaluate and manage both ethical risk and ESG risk. In the 2020s, opposition emerged among some institutional investors to ESG standards. Several U.S. states banned their state reserve funds from being invested in “ESG funds” that favored investments in companies with good governance, as well as environmental and social performance. President Donald Trump, running to be re-elected President in 2024, repeatedly expressed his opposition to ESG and DEI (diversity, equity and inclusion) factors and argued they were detrimental to corporate governance. In response, many companies dropped the term ESG, ESG reports to boards, and their ESG board committees themselves. There was no indication, however, that the governance standards adopted and advocated over decades of emphasis on corporate governance were being reversed. In the UK, the parallel history of corporate governance standards would include the 1992 Code of Best Practice (produced by the Cadbury Committee), the 1998 Corporate Governance Code which replaced the Cadbury Code, and the 2016 revision of the Corporate Governance Code, which focused more directly on shareholder rights.
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