Historical Perspective on Corporate Oversight: 200 Years of Corruption

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Historical Perspective on Corporate Oversight
200 Years of Corruption

• Its Report is probably characterized as gentlemen
  calling the attention of other gentlemen to the
  disagreeable fact that there were a few
  scoundrels in their midst who needed a good
  thrashing.
• Lawrence Mitchell

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The Hughes Committee08

• The Committees principal speculative concern was
  futures trading, and the forms and methods of
  futures trading that were legitimate and gambling
  were indistinguishable
• The Committee did urge brokers to require higher
  margins to dampen the speculative effects of
  margin trading

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Hughes Committee1908

• Appointed by New York Governor Charles Evans
  Hughes to investigate speculation in securities
  and commodities after the panic of 1907
• New York City was crisis central in 1907
• The Committee rejected mandatory registration
  and disclosure of corporations rationale the
  state might loose business to states without
  these regulations
• The Committee blamed the New York Stock Exchange
  for the problems and defined the solution as
  NYSE self-regulation

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What is a Scandal?

• Like the terms speculation or corruption, the
  idea of a business scandal is loosely defined
• According to Wikipedia A scandal is a widely
  publicized incident that involves allegations of
  wrongdoing, disgrace, or moral outrage
• How corruption and scandals are defined has
  changed over time, but bribery, speculation,
  greed, and power seem to be common in all periods
• A corporate scandal often involves accounting
  fraud

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Present at the Creation

• 1776 and all thatNo money, no banks, no revenue,
  no army Lets fight the most powerful nation on
  earth! Speculators, of course, ruined the value
  of continental currency
• Robert Morris, the first financial genius
  (Superintendent of Finance he chartered the Bank
  of North America, the first commercial bank)then
  land speculation Morris headed to debtors
  prison neither the first nor last problem with
  greed, speculation, and too much leverage
• The Constitution, a strong federal government
  with taxing authority, but no federal corporation
  authority
• Alexander Hamilton as the first Secretary of the
  Treasury insisted that all paper money and
  outstanding notes be paid in full. Hamilton was
  involved in a Treasury Dept. scandal in the
  1790s the husband of his mistress blackmailed
  him

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19th Century Scandals

• The Birth of Business transportation, banking,
  and manufacturing slow rise of corporations
  problems with interstate commerce
• Drew, Gould Fiskmarket manipulators, fight for
  the Erie
• Political machines such as Tammany Hall
• Credit Mobilier
• Cornering the gold market
• Rockefeller and Standard Oiluse of the trust to
  deal with interstate commerce
• J.P. Morgan and the Money Trustthe great merger
  movement beginning in the 1890s

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Political Graft

• Aint it perfectly honest to charge a good price
  and make a profit on my investment and foresight?
  Of course, it is. Well, thats honest graft.
  George Washington Plunkitt, Tammany Hall, 1905
• Political graft was institutionalized by all
  levels of governments during the 19th century.
  Tammany Hall, the political machine of New York
  Citys Democratic Party was the most infamous,
  but local and state machines dominated well into
  the second half of the twentieth century
• Since state legislatures chose senators until the
  17th Amendment, the machines influenced
  Washington as well
• Political graft meant that businesses were
  expected to bribe the political bosses to do
  business in their jurisdictions business and
  politics was linked in complex networks ever
  since as regulations went into effect, the
  networks changedcertain links became illegal
  and at least a few corrupt politicians and
  business people went to jail

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Railroads and Industrial Corporations

• Railroads needed a large capital base requiring
  non-active investors these were chartered by
  states (cash bribes a basic business practice)
  construction fraud common active railroads
  subject to manipulation by investors railroad
  rebates to big shippers
• Corporations based on state laws which were often
  restrictive interstate commerce problematic
  (solved with New Jerseys lenient
  incorporation law in 1896) problems of cutthroat
  competition vs. conspiracy monopoly collude,
  coordinate, consolidate

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20th Century Scandals

• The Great Merger Movement (1897-1903)The Stock
  Watering Scandal? U.S. Steel Was the Biggest
• Standard Oil, 1911 Supreme Court decision
• Teapot Dome blatant corruption at the federal
  level during the Harding administration
• New York Stock Exchange behavior in the 1920s
  insider trading, preferred lists, stock pools
  and price manipulation, lack of disclosure
• Krueger Toll, Samuel Insull pyramiding,
  McKesson Robbins (1930s)
• Insider trading, junk bonds savings loans
  (1980s)
• Various accounting scandals Equity Funding,
  ZZZZ Best, EMS Governmental Securities, BCCI,
  Barrings Bank, Waste Management, Long-term
  Capital Management, Sunbeam, Cendant, New York
  Stock Exchange (floor trading), Rite Aid

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19th-20th Century Reform

• Business incorporation was at the state level
  New Jerseys incorporation laws of the 1890s
  allowed interstate commerce for corporations
  (considered a political scandal at the timethe
  issue of accommodating states)
• Early federal legislation included the Interstate
  Commerce Commission Act of 1887 and Sherman Act
  of 1890
• The Progressive movement led to dozens of
  legislative bills, but no effective action until
  the Federal Reserve Act, Federal Trade Commission
  Act, and Clayton Act, all around 1914
• Securities Exchange Commission Acts of 1933-4
  as part of the New Deal, with a focus on
  disclosure and self-regulation that included
  audits

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21st Century

• Tech bubble burst major scandals Enron,
  Global Crossing, WorldCom, Tyco, Qwest, Adelphia,
  Imclone collapse of Arthur Andersen
• After Enron came Congressional hearings the
  Sarbanes-Oxley Act of 2002, real reform at a high
  cost
• Enron hearings plus WorldCom collapse led to
  Sarbanes-Oxley Act , the first major reform since
  the 1930s
• Then new scandals just kept coming HealthSouth,
  Fannie Mae, stock options backdating, Sub-prime
  Loans, investment and commercial banks

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What We Have Learned

• Greed dominates importance of incentives that
  drive motivation to cheat
• Regulation is necessary as the economy and
  capital markets change and to curb most blatant
  abuses
• Continuing problems executive compensation is
  essential unchanged over-leverage
  speculation
• Scandals still happen, but the market and the
  economy have nothing like the corruption in the
  second half of the 19th century