The Corporate Board: How it started vs. How it’s going

The role of the corporate board, who should be on it, and how it operates is something that has changed over the years – especially in the last decade. But to understand how we got to where we are now, you have to understand how we – and the board – started.

How it started

What we now know and understand as corporate governance – or the balance of power and decision-making between board directors, executives and shareholders – emerged in the 17th century with the Dutch East India Company and other major companies that participated in the market at that time. 

Jean-Paul Rodrigue, Professor, Hofstra University

At that point, governance – which did not have an official name – was about managerial accountability, including the role of shareholders and board members. The role of the board of directors was always "to protect and enhance the well-being of its corporation through their oversight of decision-making processes surrounding resource allocation and risk tolerance." Still, how the board is chosen and the various structures that have emerged are elements that have evolved.

The Dutch East India Company – as mentioned – was the first to bring this kind of structure to light when they took control of the East Indies trade market and developed a system for trading. This looked like a modern-day LLC – where several private companies paid in capital for ownership of the market but were only limited to what they invested. This was a new way to trade, and it eventually led to a desire for a management system, and thus – the board was born!

The key element of the inaugural board was that the board balanced the interests of the shareholders against assurance that instituted policies would benefit the company as a whole. Another critical element was the independence of the board members – they were not shareholders and could not have an investment interest in the company. The separation of ownership and control was vital to ensuring the well-being of these companies.

 

How it evolved 

As time went on and the economy boomed, corporate governance (still undefined) continued to evolve. For example, following World War II, company managers made the majority of a company's decisions. The board and shareholders followed. This, of course, was interesting since managers played a heavy hand in selecting who sat on the board at any given time (while investors tended to stay out of most business matters unless it directly involved stocks).

In the 1960s and 1970s, however, we start to see a shift. Several companies – especially in the United States – are overcome with fraud and abuse at the board level. This is due primarily to the lack of oversight boards experienced and a dwindling of independence (which, remember, was an essential element of boards established in the 17th century). 

In 1976, the Securities and Exchange Committee (SEC) in the US required all boards of publicly traded companies to have an audit committee of all independent board directors – and thus, the term "corporate governance" was officially in the lexicon. In addition, company directors imposed more rules on the board to ensure that business was being conducted ethically and fairly.

Over the years, despite changing regulations, the corporate board took shape in quite a standard way. Typically composed of a number of experts in a given field, the board – often filled with white men of a certain age – came together with a specified number of times a year to discuss issues in front of the company, set strategy for the year, vote on issues, and make sure the company was operating smoothly. 

Meetings – traditionally – were held in-person and were a bit of a show, with a great deal of money spent to accommodate these high-powered individuals. While board members could be located anywhere in the world, the in-person nature of these meetings was considered crucial, as votes could not be cast and opinions could not be heard otherwise.

 

How it’s going

As time went on, we began to see the impact of having a board made up of much of the same. For example, company culture is a top-down issue. If the board is not open and transparent, then managers within the company won't be either. If the board is viewed as perpetuating a toxic culture, then that can seep down to the employee level. We also started to see – and finally discuss – the lack of diversity at board level and the impact across the company and at market level. 

A successful and effective board needs a "mix of skills and experience to carry the organisation through its long-term strategy and remain attuned to risk." And finally, we saw that as the board evolved – and as society evolved – boards started to lean into and learn about the prospects of going from the age-old in-person structure to more of a digital option.

Let's look at what this all means for the modern board, how it's adapting, and how the principles of the original board remain intact.

 

Embracing diversity

Diversity means gender, race, sexual orientation, and experience (and, honestly, probably more than even just that). Having diversity on a board means more varied experiences to pull from, which means more insight and wide-ranging views into how the company can approach and tackle problems. For example, a black woman will be able to identify issues that a white man may not see, and an Indian man who worked at a tech company will have a unique way of solving a problem compared to a Latin woman who worked in finance. But all of these humans together will be able to develop strategies and solutions unlike any other set, which will help the company in the long run.

And we are already starting to see change – a recent study shows that female representation on boards is up in recent years, and we see similar statistics across different races (though there is still work to do). If we think about the key priority when the first board was established – the goal was to "enhance and protect the company's well-being," and having diverse boards is a crucial step to accomplishing just that.


Promoting company culture.

The Board level can feel like a birds-eye view of a company, and it can be difficult to have real insight into what is happening at the employee level when it comes to culture. But the job of the board is to set the tone and create rules that benefit the company as a whole – and happy employees mean a happy company. 

At a baseline, there is a direct correlation between board culture and company culture. This correlation is why boards should encourage questions, embrace and welcome alternate viewpoints, and have open and honest conversations (which are often also tricky) about the company, its people, and its culture. Instituting this type of culture from the top will encourage it across the company, encouraging useful and impactful dialogue and making the board aware of risks and issues that may not traditionally be on the radar.

 

Going digital.

Let's start with the obvious – we learned in 2020 that we do not need to be in-person to do business. Businesses operated globally from the comforts of home out of necessity but realised that people wanted to continue that shift – even in a flexible manner. But digital does not just mean phoning it in from the couch in your pyjamas – at the board level, going digital has several benefits. 

 

First, Digital platforms allow boards to operate more efficiently, safer, and for less money than in-person. Second, technology will enable boards to be more transparent. Third, technology gives board members more flexibility – meaning you may attract more diverse and influential members – and helps ensure compliance with the various regulations that are in place. Again – the board of the 17th century was established with the notion that it would make sure everything was running correctly and technology helps achieve this goal.

 


It's fair to say that the board has changed, and that is not a bad thing. The modern board is leaning into this, doing what it can to understand new regulations, trends, and challenges. And while not every board is going to get it right, straight away, the fact that we are trying is a step towards the positive.

The first board established in the 17th century set up a framework for today's boards to follow, but it, of course, could never have accounted for the change that would follow or the modern responsibilities and challenges that today's boards face. It's essential, however, to look back and remember where we started and the core principles that the boards of old established. Trends may evolve and change, but the purpose of the board remains.

  Back to Posts