This document provides an overview of the history and evolution of corporate governance. It discusses how early joint stock companies formed in Europe in the 16th century to pool resources for overseas trade. Some of the earliest charter companies included the British East India Company, Dutch East India Company, Muscovy Company, and Eastland Company. These companies were granted monopolies and other powers by European kingdoms. Over time, concepts like limited liability for shareholders emerged to address problems with joint stock companies. By the 20th century, characteristics like limited liability, transferable shares, and centralized management defined the modern corporate form. The document also discusses how corporate objectives and goals have changed over time, from being defined by founders to addressing multiple stakeholders. It provides

1. 4-1
Evolution of Corporate Governance
Prof. Aparna Kanchan

2. 2
Learning Objectives
1. Briefly trace the history of Corporate Form and
Models
2. Understanding the context of Corporate Objectives &
Goals
3. Different forms of Ownership Pattern
4. Issues plagued in Managing Public Limited Companies
5. Agency Problems
6. Intro to Stewardship Concept

3. HISTORY OF CORPORATE FORM
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4. 4
Trade Potential in 16th Century
 Till 15th century sole proprietorship or partnership
 During 15th century- Europeans found opportunities
in Asia and Africa
 Trade required lot of capital
 Loans – risky- overseas trade- no assurance of
money return
 If there is profit, its huge

5. Charter Companies
 Why not pool the resources and share the profits?
 European Kingdoms issued charters for forming
companies – joint stock companies – issued shares
 Companies enabled merchants to band together to undertake ventures
requiring more capital than was available to any one merchant or
family.
 Typically, these companies were formed from the sixteenth century
onwards by groups of European investors to underwrite and profit
from the exploration of Africa, India, Asia, the Caribbean and North
America, usually under the patronage of one state, which issued the
company's charter.
 Appointed board of directors to supervise the
management on behalf of shareholders
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6. Charter companies
 Muscovy company- Britain – 1555- trade with
Russia
 1579 -Eastland Company (North Sea
Company) - trade with Scandinavia and Baltic
Sea Nations
 Levant company- trade with Middle East-
1581
 East India Company- 1600
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7. British East India Company
 December 31, 1600, the last day of the sixteenth century, the
Queen granted a Royal Charter to a group of English
merchants under the name, Governor and Company of
Merchants of London trading with the East Indies.
 The charter awarded the newly formed company, for a period
of fifteen years, a monopoly of trade with all countries to the
east of the Cape of Good Hope and to the west of the Straits
of Magellan
 The Company was finally dissolved on 1 January 1874, as a
result of the East India Stock Dividend Redemption Act. 7

8.  Dutch East India Company –
 "United East India Company") was a chartered
company established in 1602, when the States-General of the
Netherlands granted it a 21-year monopoly to carry out colonial
activities in Asia.
 It is often considered to have been the first multinational
corporation in the world and it was the first company to
issue stock.
 It was also arguably the first megacorporation, possessing
quasi-governmental powers, including the ability to wage war,
imprison and execute convicts, negotiate treaties, coin money,
and establish colonies.
 Dutch East India Company also established Amsterdam
Stock Exchange
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9. Nature of Charter companies
 Right to deal with rulers (Monarchs)
 Right to form banks
 Right to own, manage and grant or distribute
land
 Can raise its own police force
 Have trade monopolies
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10.  Early joint stock companies – only trade- no
manufacturing
 The shareholders did not have limited liability
Spread to manufacturing industries after
industrial revolution
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11. Problems with JSC
 Liability –
 Shareholders don’t manage their money. But
they are liable to the creditors in case of losses.
 The majority shareholders who manage the
company may show fake losses to other
shareholders
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12.  France -1807- Napoleon - limited liabilities
 With Napoleon’s conquest on Europe the
concept spread
 It is Civil law version of limited liability
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13. Common law version Limited liability
 1811 - New York state brought in a general
limited-liability law for manufacturing
companies. Other American states adopted it
 1844- Britain adopted limited liability for
shareholders – made it mandatory to have
annual statutory audit with the auditor being
selected by the shareholders.
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14. Limited liability
 Concept of limited liability was not new
 Roman empire had certain types of limited
liability – but they were for partnership firms
– not an universal limited liabilities
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15. Corporate form gradually emerged in the 19th
century
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16. Characteristic of Corporations in 20th century
 Limited liability
 Transferability
 Legal personality
 Perpetual entity
 Central management
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17. Corporations – Purpose
 Human satisfaction – Everybody needs
everything
 Social structure
 Efficiency
 Identity
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18. Expectations
Jobs, Products and services to satisfy needs
But Profit is the main motive of business
corporations
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19. Business Ownership Pattern
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20.  Traditionally the business firms are promoted
and controlled by business families
 Even today 35 % of Fortune 500 companies
are controlled by Families
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21. Oldest Business Entity
 Till January 2007, World’s oldest family controlled business
was Kongo Gumi, founded in 578 AD. It was into the
business of constructing Buddhist Temples.
 After Meiji Restoration the company diversified into
commercial construction. Still temple construction accounted
for 80 % of their revenue
 In January 2007, it ceased to be a company controlled by the
family due to debt problems and unfavorable business
conditions. It was bought by Takamatsu, a large Japanese
construction company and became its subsidiary
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22.  As of now the oldest family owned business is
‘Hoshi Ryokan’ founded in 718 AD – Hotel
business
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23. Majority Stake owners Classification
 Business Families
 Governments
 MNCs
 Institutional Investors (Mutual funds, Pension
funds)
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24. Japan
 Zaibatsu – before WW II – 14 powerful
Zaibatsu’s controlled 25 % business assets in
Japan – Mitsui, Mitsubishi, Sumitomo
 After WW II - Keiretsu – Crossholding
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25. Ownership pattern in USA
 Wide spread shareholding
 Separation of ownership and management
Professional managers
 Why did this happen
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26. USA
 Dominance of Families in business till 20th
century
 US government raised funds and placing
bonds with the public during WW1.
 Tightened laws related negotiable instruments
to push the bonds
 Success of Investment banks in selling
securities among public
 Habit of investing in securities
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27. After WW I
 Dilution of family shareholding to expand business
 Booming stock market helped the securities market
 Highly efficient legal system encouraged the people
to invest in shares and securities
 Big market in USA provided an opportunity to grow
big which was not available in other countries
 Competition among states to get the companies
incorporated
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28. Organizational Goals
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29. Organizational Goals - till 15th Century
 Till 15th century - Goal of the entrepreneur is
the goal of the organization
 Charter Companies – Goal is defined in the
charter
 From Mid 19th century mid 20th Century -
Goal of the promoter is the goal of the
organization
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30. Goals in Modern Corporation
 Promoters do not have majority stake in the
firms (mainly Anglo American Firms)
 All stakeholders are aware of their rights and
very demanding
 Employees, customers, stakeholders and
Society - objectives are conflicting
 The Example of Nutrition value in Food and
cost of food – By Herbert Simon
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31. Importance of Goals
Legitimacy to external audiences such as:
* Investors
* Customers
* Suppliers
A source of motivation and commitment
* Help employees identify with the organization
* Reduce uncertainty and clarify what employees
should accomplish.
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32. Goals of modern firms
 Broad goal is indicated by the mission
statements
 How they get transformed to next level is
reflected in the Value statements
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33. Organizational Mission
Reason for existence, the basic purpose
Focus on items such as:
* Market and customers
* Desired types of activities
* Values, aspirations, and reason for being
* Product quality
* Location of facilities
* Attitude toward employees.
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34. Strategic goals
Broad statements describing where the
organization wants to be in the future.
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35. Peter Drucker's Eight Areas of Focus
1. Market standing relative to competitors
2. Innovation of new methods or products
3. Productivity or efficiency
4. Resources, both physical and financial
5. Profitability
6. Managerial performance and development
7. Worker performance and attitude
8. Public responsibility to customers and society.
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36. Tactical Goals
Define specific results for major divisions and
departments within the organization to
achieve.
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37. Operational Goals
Define specific results expected from
departments, work groups, and individuals.
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38. EXAMPLE MISSION
STATEMENTS
38

39. ITC
To enhance the wealth
generating capability of
the enterprise in a
globalizing environment,
delivering superior and
sustainable stakeholder
value
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40. Aditya Birla Group
 To deliver superior value
to our customers,
shareholders, employees
and
society at large
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41. Infosys Technologies Ltd
 To achieve our
objective (of wealth
creation) in an
environment of
fairness, honesty, and
courtesy towards our
clients, employees,
vendors and society at
large."
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42. Tata Group
 At the Tata Group our
purpose is to improve the
quality of life of the
communities we serve. We
do this through leadership
in sectors of national
economic significance, to
which the Group brings a
unique set of capabilities.
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43. Do all the companies have well defined
Mission statements?
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44. Goals and Ethics
 Why studying ‘Goals’ in Ethics Course?
 Goals Influence the way companies fulfill
their responsibilities to the stakeholders
 Example – Sears Holding Corporation – the
parent company of Kmart and Sears, Roebuck
and Co - Auto Service Centers – Problem of
overcharging customers
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45.  Edward A. Brennan, CEO and Chairman of Sears,
Roebuck & Company, made the following statement
in 90s
“We are confident that our Auto Center customer
satisfaction rate is among the highest in the industry.
But after an extensive review, we have concluded
that our goal and hence goal-setting program and
(subsequent) incentive compensation and
inadvertently created an environment in which
mistakes have occurred. We are moving quickly and
aggressively to eliminate that environment”
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46. THANK- YOU
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