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The Center for Audit Quality Gallery on Corporate Governance

Coming to Grips with Prosperity

Crisis of Management

“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.”

September 23, 2003 Interview with Stanley Sporkin

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

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Footnotes:

(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.

Related Museum Resources

Papers

January 8, 1970: Concept of the Corporation - Adolf Berle
transcript pdf (Adolf A. Berle, Jr. Papers, courtesy Franklin Delano Roosevelt Presidential Library)
September 10, 1970: Recommendations to SEC Chairman Hamer Budge from Professor Donald Schwartz on proxy rule amendments
image pdf (Courtesy of National Archives)
March 1, 1971: New York Stock Exchange News Bureau: Pension Holdings Up on Big Board
image pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
March 26, 1971: Invitation to Lewis Gilbert from Neal McCoy to meet with SEC Proxy Task Force
transcript pdf (Courtesy of National Archives and Records Administration)
November 5, 1971: Memo to SEC Commission from Division of Corporation Finance suggesting alternative courses of action for shareholder proposals
image pdf (Courtesy of National Archives)
November 10, 1971: Memo for SEC v. Medical Committee for Human Rights
transcript pdf (William O. Douglas Papers, courtesy Library of Congress)
December 31, 1971: Memo to SEC Commission from Division of Corporation Finance on multiple proposal submissions during 1971 proxy season
image pdf (Courtesy of National Archives)
January 15, 1972: Memo to SEC Commission from Division of Corporation Finance regarding proxy rule 14a-8 release
transcript pdf (Courtesy of National Archives and Records Administration)
February 3, 1972: Complaint for Injunctive and Other Relief, U.S. Securities and Exchange Commission v. National Student Marketing Corporation
document pdf (Courtesy of Richard Rowe)
May 21, 1972: Protest to SEC Chairman William Casey from Tolman Everett on misuse of proxy rules
image pdf (Courtesy of National Archives)
June 13, 1972: Reply to Tolman Everett from Peter Romeo, SEC
image pdf (Courtesy of National Archives)
June 16, 1972: Further protest to SEC Chairman William Casey from Tolman Everett on SEC response
image pdf (Courtesy of National Archives)
June 16, 1972: Letter to SEC Chairman from James Jeffery with concerns on corporation management
transcript pdf (Courtesy of National Archives and Records Administration)
June 30, 1972: Reply to James Jeffery from James Clarkson, SEC Attorney Adviser on proxy rules
transcript pdf (Courtesy of National Archives and Records Administration)
October 3, 1972: "Investor Relations and Corporate Credibility" - Address by SEC Chairman William J. Casey to National Investor Relations Institute
image pdf (Courtesy of Stephen A. Zeff)
June 14, 1973: Current Financial Reporting Issues - Remarks by James Needham, New York Stock Exchange
transcript pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
December 20, 1973: SEC statement of policy on the establishment and improvement of accounting principles and standards
image pdf (Courtesy of the Gerald R. Ford Library)
January 31, 1974: Supplemental memo to SEC Commission from Division of Corporation Finance regarding illegal campaign contribution disclosure requirements
transcript pdf (Courtesy of National Archives and Records Administration)
March 29, 1974: "Forecasting: A Look at the Future," Address by SEC Commissioner A.A. Sommer, Jr. to the Corporate Financial Forecast and Disclosure Conference, Drexel University
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
May 9 and 10, 1974: John C. Burton "The Case for Continuation of Mandatory Independent Audits for Publicly Held Companies"
document pdf (Government Records)
September 11, 1974: "Our Attitude Toward the Accounting Profession," Address by SEC Chairman Ray Garrett, Jr. to Arthur Andersen & Co. Annual Partners Meeting
transcript pdf (Courtesy of Harvey L. Pitt)
September 11, 1974: "When the Individual Investor Returns, Will He Get A Fair Shake?" - Address by SEC Commissioner A.A. Sommer, Jr. to the Milwaukee Investment Analysts Society
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
January 31, 1975: John C. Burton, "Pension Accounting and Disclosure Under the New Pension Reform Act," for the Conference on the Pension Reform Law, University of Virginia
document pdf (Government Records)
May 5, 1975: Memo to SEC Chairman from Office of General Counsel regarding hearings on disclosure of socially significant information
transcript pdf (Courtesy of National Archives and Records Administration)
May 7, 1975: Memo to SEC Chairman from Office of General Counsel on disclosure of affirmative action plans
transcript pdf (Courtesy of National Archives and Records Administration)
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
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 9, 1975: Memo to SEC Commission from Division of Corporation Finance regarding disclosure recommendations
transcript pdf (Courtesy of National Archives and Records Administration)
February 16, 1976: "Business Ethics and the Free Enterprise System," Remarks by SEC Commissioner A. A. Sommer, Jr. to the National Association of Truck Stop Operators Seminar
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
March 15, 1976: Address by SEC Chairman Roderick M. Hills to the Association of the Bar, New York, New York
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
March 30, 1976: Memo to SEC Commission from Division of Corporation Finance regarding integration of corporate disclosure
transcript pdf (Courtesy of National Archives and Records Administration)
April 12, 1976: Form 19b-4A - Proposed Rule Change by New York Stock Exchange, Inc.
image pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
April 12, 1976: Letter to U.S. Securities and Exchange Commission from James Buck, New York Stock Exchange
transcript pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
April 13, 1976: Corporate Morality - Whose Business Is It? - Address by SEC Chairman Roderick M. Hills to Town Hall, Los Angeles, California
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 8, 1976: Letter to the Board of Directors, New York Stock Exchange from Edward A. Morris
image pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
June 21, 1976: Address by SEC Chairman Roderick M. Hills to the American Enterprise Institute
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 24, 1976: Independent Audit Committees - New York Stock Exchange Research Report
transcript pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
September 3, 1976: Letter from William F. Batten, New York Stock Exchange, to Chief Executive Officers seeking comments on proposal for audit committees
image pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
September 10, 1976: Letter from SEC Chairman Roderick M. Hills to William M. Batten, New York Stock Exchange on proposal for audit committees
image pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
September 27, 1976: Memo to SEC Commission from Division of Corporation Finance on proposals to integrate disclosure about management
image pdf (Courtesy of National Archives)
October 7, 1976: Telegram from Richard B. Sellars, Chairman of the Board, Johnson & Johnson, to William M. Batten, Chairman and CEO, New York Stock Exchange, opposing requirement of Audit Committees composed entirely of non-employee directors
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
January 31, 1977: Form 19b-4A - Proposed Rule Change by New York Stock Exchange, Inc.
image pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
January 31, 1977: Letter to U.S Securities and Exchange Commission from James Buck, New York Stock Exchange
image pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
March 9, 1978: SEC News Release: Commission Approves NYSE Rule to Require Independent Audit Committees
transcript pdf (All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)

Oral Histories

09 May 2012 Richard Beckler With Dr. James Stocker

edited transcript (pdf)

14 April 2008 Daniel Goelzer With Dr. Kenneth Durr

Video: 10:10

edited transcript (pdf)

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.

17 June 2013 Harvey Goldschmid With Robert K.D. Colby