Accountability is going global.

• Author: Gallagher, Terence J.
• Position: Column

We may be evolving toward an international set of corporate governance principles.

The current popularity of corporate governance issues seems surprising. After all, balancing the relationship among the main players in corporate management is nearly as old as the corporation itself And yet, this balance is constantly changing in response to changes in the business community and in society at large.

In the early days of private corporations, founding families were not only shareholders but also managers and members of the board of directors. However, the need to raise ever greater amounts of capital soon required that third parties become investors, managers, and directors. When this happened, corporate governance was born.

After going public, many corporations continued to be guided by their founding family, but as the holdings of the family dispersed, corporate ownership shifted to many individuals with small holdings. These small shareholders were not sufficiently organized to control the corporation. As a result, company managers acquired greater corporate control. This concentration of power has been checked over the past 20 years by the growing accumulation of shares in the hands of large institutions, such as public pension plans and union pension funds. Today these so-called institutional investors have become the dominant party in Corporate America and are seeking to make management and the boards of directors increasingly more accountable to shareholders.

In the United States most public companies now recognize that a new balance must be struck in order to provide suitable accountability to shareholders. That new balance is being achieved through boards composed substantially of independent directors who are guided by principles of corporate governance that shift the balance of power from the CEO to the board.

The process of corporate governance has also become a hot topic in many developed countries. Some of these countries, such as England, have a history similar to that of the U.S. vis-a-vis public companies. The evolution of corporations has, however, followed a very different path in other nations. In Japan, for example, the formation of keiretsu business relationships through cross-holding of shares among companies has a long tradition. This method of operating makes the corporate entity -- rather than the shareholders -- the focus, and gives managers, who also serve as directors of the various companies, the controlling...