If
one assumes that capitalism is the dominant economic model
in the world today as Thurow (1997) suggests, then one might
trace the rise of accountability and control as key organizational
issues within this socio-economic context to better understand
the rise of the concept of CG. Writing
in the 18th century at the dawn of the industrial
revolution, Adam Smith mooted that conflict can arise if companies
are run by managers who are not owners. He posited that salaried
managers could not be expected to watch over the money of
other investors with the same care with which they would look
after their own (Smith and Krueger, 2003). While Smith made
his case, the United States and the rest of Europe entered
a new phase in economic development with the advent of transport
and communication systems (rail and telegraph systems), which
allowed firms to sell to distant markets and take advantage
of the scale and scope of opportunities. The significant investment
and the operational complexities posed by such expansion,
accompanied a new trend for owners to become separated from
managers and gave rise to the modern industrial corporation
(Chandler, 1990).
As
enlarged firms grew further in complexity, the trend was reinforced
and owners became the investors, which, as a class, had neither
the expertise, experience, information, inclination nor time
to manage the affairs of the business themselves, thus cementing
the role of the salaried manager as an essential element of
corporate life. This manager eventually became the person
who would make decisions about resource allocations even though
they were not the owners of those resources or the enterprise
they ran (Chandler, 1990; and Freeman and Soete, 2000). In
addition, the introduction of the limited liability company
(Limited Liability Act of 1855 in the UK) reduced the personal
risks of investment and therefore boosted the economic activity
and investment in startups and expansion considerably (Chandler,
1969; Porter, 1980; and Tricker, 2000). |