The effort to regulate corporate governance took the SEC beyond its original mission into the broadened fields of corporate accountability, including the responsibility of corporate boards, and the duty of accountants to fully and fairly produce records that promoted full and complete public disclosure of financial information.
A conundrum facing the proponents of SEC regulation of both corporate accountability and accountant ethics was the traditional role that state law had over both of those areas. Historically, the standards of conduct for corporate officers and directors had been addressed in state statutes and judicial decisions.(44) Critics questioned whether the SEC could constitutionally implement a federal standard of ethical corporate board behavior that conflicted with a particular state statutory scheme and with larger principles of federalism.
But the marketplace revolution that A. A. Sommer, Jr. had predicted was taking place. The emergence of corporations doing business nationally and internationally, which formed the mainstay of businesses listed on the national stock exchanges, bore little resemblance to the size and scope of corporations that state statutes had anticipated would be subject to regulation.(45)
A series of public disclosure and private lawsuits helped transform conceptions about the role and responsibility of corporate boards to regulate the behavior of publicly-traded corporations. In 1968, the Medical Committee for Human Rights filed a stockholder suit against Dow Chemical for its manufacture and use of napalm on human beings. The effort of Campaign GM to persuade the General Motors board "to adopt socially responsible" transportation, pollution, and minority employment policies was an example of challenges by stockholders to focus board on expanded social obligations of publicly held corporations.(46)
The spectacular 1970 collapse of the Penn Central, which at the time of its bankruptcy was the largest railroad company in the country, and the subsequent disclosure that in the preceding year its Board of Directors had approved speculative real estate investments and over $100 million of dividends while its debts went unpaid, created growing calls for corporate board reform. Critics argued that the Penn Central board, which lacked members with in-depth public accounting experience, had engineered that great national corporation headlong into insolvency.
These events restarted a long-standing academic debate over the changing nature and responsibility of corporate boards. Critics questioned the idea that all corporations had engaged, dedicated corporate boards, instead detailing examples of corporate board members who acted as place-holders, obedient to the company president, and subservient to the interests of the officers and managers of the company.(47) The questionable payments investigation conducted by the SEC in the aftermath of Watergate was seen by many as evidence that state corporation law defining proper corporate governance had proven inadequate to promote ethical corporate behavior.
(44) John Coffee, "Beyond the Shut-Eyed Sentry: Toward a Theoretical View of Corporate Misconduct and Effective Legal Response," 63 Virginia Law Review, 1109-1110 (1977)
(46) Medical Committee for Human Rights v SEC, 432 F.2d 659 (Ct of Ap, DC Cir, 1970); Donald E. Schwartz, "The Public Interest Proxy Campaign: Reflections on Campaign GM," 69 Michigan Law Review 421 (1971)
(47) Myles Mace, Directors: Myth and Reality (Cambridge: Harvard University Press, 1971)
