Evolution of Corporate Governance

Corporate governance may have been introduced later than the inception of corporations themselves, yet its significance has only escalated over the years. To understand it better, corporate governance contains all the practices, frameworks, and rules that steer a company’s direction.

The Emergence of Corporate Governance Practices

During the 1970s, United States had initiated the concept of corporate governance for the first time. However, the 1990s witnessed a series of corporate misconducts that led to the commissioning of the Cadbury Report by the government. This report, released in the UK in 1998, introduced a novel principle known as “comply or explain.” This principle mandates companies to follow the law or provide a written explanation for any non-compliance, a practice that has been adopted by various countries thereafter.

In the early 2000s, several countries responded to corporate scandals by enhancing their corporate governance standards. India improved its regulations in 2000 based on the recommendations of the “Birla Committee,” influenced by the UK’s framework. The United States, Australia, and Germany also introduced new regulations in 2002 following major corporate collapses. Spain, Ireland, and Japan adopted corporate governance codes by 2015, while countries in the Middle East, including Saudi Arabia, Egypt, Jordan, Kuwait, Bahrain, Qatar, and the UAE, followed suit in subsequent years.

Global Drivers of Governance Trends

The expanding importance of corporate governance codes can be recognized to various factors:

Persistent corporate scandals, bankruptcies, and financial penalties against companies highlight the need for robust governance.
Legislation related to corporate governance is expanding and becoming more international in scope.
Global challenges like the COVID-19 pandemic, geopolitical conflicts, and supply chain crises have heightened the demand for transparency and stability from investors.
The growing emphasis on Environmental, Social, and Corporate Governance (ESG) underscores a global shift towards valuing corporate responsibility beyond mere profit.
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Corporate governance now performs as a critical benchmark for assessing businesses. Stakeholders, including investors and business partners, use it as a measure to decide on their engagement with companies. In principle, businesses face a straightforward choice whether to adopt sound governance practices to thrive or neglect them and expose potential risks.

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