“A new consensus is emerging with respect to the vital monitoring role to be played by the board of directors in the corporate accountability process and the most desirable and appropriate composition and structure of a board designed to play such an enhanced oversight role. The consensus is moving strongly towards greater participation by directors independent of management, currently calling for a board composed of at least a majority of independent directors, with properly functioning independent audit, compensation, and nominating committees, as essential to enhanced and effective corporate accountability.”
It seemed as if the reforming zeal behind the Foreign Corrupt Practices Act might carry forward into new federal corporate governance initiatives. In 1977, at the recommendation of SEC Chairman Roderick Hills, Columbia University’s American Assembly took up the issue of corporate governance. Attendees backed majority outside directors and more diverse boards, but fell short of recommending boards consisting solely of independent directors. The American Assembly concluded by noting, “If private initiatives fail, the issues of corporate governance are important enough that the government will have to address them.”18
SEC Chairman Harold Williams, who succeeded Hills, was convinced that, whether or not regulation resulted, the federal government should weigh in on corporate governance. In his previous experiences as a company officer, Williams had been disappointed by the lack of oversight provided by directors. Boards, he said, “had become mini-societies and nobody wants to be the skunk at the picnic.”19 Williams favored boards composed primarily of independent directors. He did not, however, believe that legislation was necessary, insisting – perhaps pragmatically - that boards remedy their own shortcomings before the government step in.20
Williams was willing to apply some pressure, and committed the SEC to a full study of the problem. What began, in spring 1977, as a routine look at the proxy process broadened into a general review of corporate governance. During hearings held across the country, SEC staff gathered information on director independence, board composition, and the functioning of the proxy process. Its Task Force on Corporate Accountability interviewed dozens of individuals and received hundreds of comments from business leaders and shareholders. The Task Force recommended and the Commission enacted rules stepping up disclosure of information on director independence. But the SEC declined to take further steps, such as issuing a rule providing shareholders with greater proxy access. Williams had spoken aggressively on corporate governance reform, but, after meeting with heavy resistance from public companies, he reined in his staff.21
The most ambitious proposals in this time of governance ferment came from outside the SEC. The Business Roundtable acknowledged the desirability of independent directors, particularly on select committees, although it opposed adding to an already significant regulatory load and against increased shareholder involvement.
It was a group of legal academics and practitioners who conducted what became a sweeping, 14-year assessment of the nation’s corporate laws. Begun in 1978 under the aegis of the American Law Institute (ALI), and conducted in cooperation with the American Bar Association, the “Principles of Corporate Governance Project” was intended to rethink the fundamentals of corporate governance and to provide authoritative, workable governance principles for American business.
Many of those involved in the project were amenable to a sweeping overhaul of American corporate law, to rein in the “imperial CEO” and liberate the “beholden board.” The 1982 release of the ALI-ABA Preliminary Draft, however, provoked a strong reaction. Corporations worried about creating potential liabilities for directors. The increasing distance from the crises of the 1970s and a shifting political climate undermined the urgency with which the project had been launched, and strengthened opposition to major reforms. As the project went on, corporate lawyers and free-market academics were able to water down the ALI-ABA proposals, building a more moderate consensus with limited impact on corporate law.22
In the late 1960s and early 1970s, expectations created by post-war prosperity brought a tentative challenge to the old ways of corporate governance. Federal legislation gave the SEC some involvement in battles for corporate control, and major corporate scandals provided strong, if temporary, impetus for reform. Shareholders sought to make social agendas corporate priorities; legislation allowed the SEC to extend its purview. But even though the institutions of corporate governance were poked, prodded, and examined thoroughly, faith in the old arrangements endured among both regulators and the public.
(18) December 20, 2002 Interview with Roderick Hills; April 18, 1978 New York Times, “American Assembly Consensus on Corporate Governance.”
(19) January 19, 2006 Interview with Harold Williams.
(20) January 19, 2006 Interview with Harold Williams.
(21) June 4, 2012 Interview with Barbara Lucas.
(22) Jonathan R. Macey, "The Transformation of the American Law Institute" (1993). Faculty Scholarship Series. Paper 1604; June 17, 2013 Interview with Harvey Goldschmid.
