The need to focus on good practices of Corporate Governance mainly arose as a response to the separation of ownership and control following the formation of joint stock companies. The owners or shareholders of these joint stock companies, who were not involved in day to day operational issues, required assurances that those in control of the company, the directors and managers, were safeguarding their investments and accurately reporting the financial outcome of their business activities. Thus, directors were the original targets of Corporate Governance, and practices and principles were designed to protect the interests of the shareholders from misdemeanours of directors. However, current thinking recognizes a company’s obligations to society more generally in the form of all stakeholders, and it has been this new thinking that has driven the study and practice of good Corporate Governance to the levels it has reached today. Perhaps it is also such thinking that accounts for the hectic pace at which developments have taken place and are taking place in the practice as well. Since the latter part of 2001, the very lively and often controversial debate on Corporate Governance became an even more turbulent debate as a result of the massive corporate scandals and failures that rocked the business world, namely Enron and WorldCom. Almost as a knee-jerk reaction, new laws, e.g.
In the Annales, he wrote: “The destruction of private wealth precipitated the fall of rank and reputation. At last, the emperor interposed his aid by distributing throughout the banks a hundred million sesterces, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found.” 1 Replace “emperor” with “governments and central banks”, “sesterces” with “dollars” or “euro”, “security” with “collateral”: this two thousand year old quotation could sound surprisingly familiar. Yet, even though two thousand years have passed, with many financial debacles in between, I think it is fair to say that we entered the current crisis less than ideally prepared. First, we had to improvise with an economic interpretation of the causes that led to those unprecedented market disruptions. The dramatic fall in confidence revealed a source of risk that macroeconomists had not modelled carefully and that had not even been considered relevant by most theorists of finance. Now, the concept of “systemic risk” is almost common knowledge. Second, we had thought that the financial system would act as a shock absorber. Portfolio theory had demonstrated that the dispersion of individual risks would attenuate aggregate risk. But the mispricing of risk multiplied exposures, and the assumption of similar risks by market participants increased the potential for contagion. In the event, we learned that dispersion does not necessarily mean effective diversification.