Securities and Exchange Commission Historical Society

The Center for Audit Quality Gallery on Corporate Governance

Evolving Corporations and Governance

Charters, States and Reformers

Since incorporation involves the conferring of special rights, corporations have always been subject to some form of governance restrictions in exchange for these privileges.

Corporations arrived in America before the Mayflower, as joint stock companies holding royal charters founded colonies. Through the end of the 18th century, corporations remained few in number, licensed occasionally by localities, states, and the federal government for the accomplishment of specific tasks beyond the financial means of an individual or partnership: building a bridge, digging a canal, or establishing a bank.

Although the propriety and legitimacy of chartered corporations remained in dispute in a nation that valued egalitarianism, economic necessity increased the demand for them during the expanding American “market revolution.” States granted a mere handful of charters in the last decades of the 18th century, but in the opening decades of the 19th century, they approved nearly 1,800. As the numbers of corporations exceeded the ability of legislatures to approve individual charters, let alone effectively oversee them, states enacted general incorporation laws, the blueprints for corporate structural and governance requirements. New York established a general incorporation law for manufacturers in 1811; Connecticut passed what is often seen as the country’s first incorporation law in 1837.

- Courtesy of the Library of Congress

Even as their numbers grew, corporations existed in tension with the old connotations of privilege. Corporations in this era tended to be local, with operations limited to one state. They also tended to be egalitarian, giving each investor a single vote, rather than a vote for each share held.

As the industrial revolution in America created enterprises that exceeded state boundaries and demanded ever-larger pools of capital, the corporate form of business organization became more commonplace, its status protected nationwide by a handful of U.S. Supreme Court decisions and dicta. By 1880, nearly every state had a general incorporation law, allowing citizens to accumulate capital while alleviating the need for the legislature to review every charter. In drafting these laws, states might have sought to exclude corporations that did not advance the public good, but they were undercut by other states competing for incorporation fees and taxes, in a practice widely known as “chartermongering.”

New Jersey pioneered the practice when it enacted an 1889 law that permitted entities organized there to hold stock in other companies, creating the “trust” arrangement that became emblematic of corporate excess by the 20th century. The state made so much from corporate fees and taxes that it had no need for other revenues, until Delaware usurped its role. As states lured corporate managers with ever more relaxed rules, and as companies grew larger, the rudiments of governance expressed in corporate charters began to change. Large shareholders became dominant within corporations, and more power accumulated to the corporate board. In some cases, as early 20th century economist and corporate critic William Z. Ripley noted, the rights of shareholders devolved “solely to directors, without even an affirmative vote or even notice of the stockholders.”2

Although the efforts of Progressive-era reformers like Ripley, and their more vocal muckraking contemporaries, focused primarily on the sheer concentration of power held by corporations, governance attracted attention as well. The Bureau of Corporations led the call for a federal incorporation law to oblige companies engaging in interstate commerce to register with the federal government, giving regulators some say over management structure and shareholder provisions. Presidents Roosevelt, Taft, and Wilson all supported the idea, but no legislation ever made it through the U.S. House and Senate, known in these years as the “Millionaire’s Club.”3

The 1920s brought greater corporate growth and a broadened shareholding public. In the 1910s, only about 3% of American households owned stock in a public company. World War I bond sales taught middle-class Americans to invest in paper; booming public companies and growing middle-class affluence drove stock ownership rates to near 25% by the end of the 1920s. As this new trend diffused ownership, the biggest investors remained influential; the greater number of shareholders possessed little ability to influence policy or remove unsatisfactory managers.

But it was sensational events, rather than structural developments, that kept concern about corporate governance alive. Just before World War I, the Pujo Committee, formed by Congress to investigate the Wall Street “money trust,” garnered headlines with pronouncements that “management is virtually self-perpetuating and is able through the power of patronage, the indifference of stockholders and other influences to control a majority of stock.”4

After the war, there were public charges that large corporations had profited excessively from, or perhaps even dragged America into, the conflict. A choir of critics, including Louis Brandeis, Walter Lippmann, Thorstein Veblen, and William Z. Ripley, called for wider shareholder participation and more managerial accountability. But to mainstream Americans, the economy looked good, and investors continued to buy into the surging market.

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(2) Subcommittee of Senate Committee on the Judiciary, Federal Licensing of Corporations: Hearings before a Subcommittee of the Committee on the Judiciary, 75th Congress 1st Session, January 25-29, 1937.

(3) June 13, 1975 “A Keynote Address – Of Sorts” - Address by SEC Commissioner A.A. Sommer, Jr. to the ABA Federal Regulation of Securities Committee Symposium.

(4) Harwell Wells, “The Birth of Corporate Governance,” Seattle University Law Review, Volume 33, no. 4 (2010).

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