“That became the Foreign Corrupt Practices Act, which is a very important piece of legislation, very important piece in the field of corporate governance. It was really one of the first entries of the SEC into the field of corporate governance. And that was just absolutely tremendous the way that it worked, but it shows you how the SEC was able to make such progress.”
From the “Summer of Love,” the upheavals of 1968, and protests over the Vietnam War, every bastion of traditional authority came under attack by the late 1960s. Corporations faced challenges from shareholder proposals seeking to make them engines of social change. Pioneered by community activist Saul Alinsky, the tactic reached its most mature form in “Campaign GM,” an effort undertaken by Ralph Nader to put proposals related to corporate social responsibility on GM’s proxy statement and to rally shareholder support.
Campaign GM and similar efforts compelled the SEC to develop new guidelines for shareholder proposals in proxy statements. The Commission eventually ruled that companies could exclude only proposals that covered matters outside of their control or that had little business impact. Encouraged by SEC staff, particularly Alan Levenson, Director of the Division of Corporation Finance, shareholder proposals increasingly appeared on company proxy statements.13
High-profile events soon turned shareholder efforts from social responsibility to corporate mismanagement. The Penn Central Railroad’s 1970 collapse was the largest bankruptcy in American history to that point. It became evident that the railroad’s directors had been lax in their oversight of the company and had failed to challenge questionable management decisions of all kinds. Harvard Business School Professor Myles Mace highlighted the Penn Central meltdown in his 1971 Directors: Myth and Reality, which argued that boards neither constituted an effective check on management nor truly set the corporate agenda.
In the wake of the Watergate investigation, it became apparent that hundreds of international companies had made improper payments, both at home and abroad, to government officials in exchange for political favor and lucrative contracts. These payments were often approved by managers and unquestioned or undetected by directors. As Daniel Goelzer recalled, that “caused people to ask themselves how corporations were governed in a way that they hadn’t asked before.”14 Together, the Penn Central debacle and the questionable payments scandals brought corporate governance under a level of scrutiny it had not faced since the New Deal.
As scandals unfolded, scholars proposed measures to strengthen boards and empower directors. At a 1973 conference on “The Greening of the Board Room,” Harvey Goldschmid urged that boards be comprised entirely of independent directors, compensated adequately for their time, supplied with appropriate data, and supported by administrative staff, thus allowing them to dig deeply enough into company matters to prevent collapses like the Penn Central’s.15 A year later, former SEC Chairman William Cary proposed that minimum federal standards be imposed on state corporate laws.16 Ralph Nader called for mandatory federal incorporation for the largest firms, which would then be overseen by independent directors responsible for both profits and probity.
Academic and activist pressure did set the stage for moderate reforms. The SEC preferred disclosure to federal incorporation, and was reluctant to assert control over internal corporate matters. At the behest of SEC Chairman Roderick Hills, the SEC worked with the New York Stock Exchange to strengthen listing requirements to require audit committees to be comprised entirely of independent directors. The SEC cooperated with the American Institute of Certified Public Accountants to develop accounting standards that would bring irregularities to a board’s attention, and worked with Congress to create new corporate disclosure standards. The 1977 Foreign Corrupt Practices Act levied penalties for falsifying corporate records or misleading auditors and required companies to impose internal controls over their accounting systems.17
(13) March 1972 Playboy interview with Saul Alinsky; January 15, 1972 Memo to SEC Commission from Division of Corporation Finance regarding proxy rule 14a-8 release.
(14) April 14, 2008 Interview with Daniel Goelzer.
(15) July 17, 2013 Interview with Harvey Goldschmid.
(16) William L. Cary, “Federalism and Corporate Law: Reflections upon Delaware,” The Yale Law Review Journal (March 1974), 663-705.
(17) December 20, 2002 Interview with Roderick Hills; September 3, 1976 Letter from William F. Batten, New York Stock Exchange, to Chief Executive Officers seeking comments on proposal for audit committees; April 23, 2014 Dorsey & Whitney LLP Anti-Corruption 2014 Spring Conference.
Daniel Goelzer served on the staff of the SEC from the mid-70’s through 1990. He began his SEC career in 1974 as a staff attorney in the Office of the General Counsel, and rose through the ranks to become the Commission’s General Counsel from 1983 to 1990. He also worked in the Office of the Chairman and was Executive Assistant to both Chairman Harold Williams and Chairman John Shad. After leaving the SEC, he was partner at the law firm of Baker & McKenzie LLP in Washington, DC until his appointment as a founding Board member of the Public Company Accounting Oversight Board (PCAOB) in 2002. He served as PCAOB’s Acting Chairman from 2009 – 2011 and returned to Baker & McKenzie after his PCAOB term ended in 2012. He was one of the founding Trustees of the SEC Historical Society.
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