History of Corporate Governance U.S.A.

The Early Years

U.S. was partially run by corporations. Some individual states were ruled by companies, such as the Massachusetts Bay Company. The Massachusetts Bay Colony was an English settlement on the east coast of North America in the 17th century, in New England, situated around the present-day cities of Salem and Boston.
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The Massachusetts Bay Colony

The population was strongly Puritan. Governance was dominated by a small group of leaders who were strongly influenced by Puritan religious leaders. Settled in 1630 by a group of 1,000 Puritan refugees from England

Types of Corporate Structure

Varies around the globe. Corporate governance varies. India- family run businesses. China- communist parties. Japanese corporations continue to operate as a hybrid between the traditional Japanese system and the Western, independent model.

Types of Corporate Structure

U.S. model -companies typically have a wide and diverse base of shareholders, banks, governments and other interests have little stake in corporations. Europe- fewer, larger stakeholders and crossholdings by banks that demand representation on the board. Germany- labor unions play an important role.
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Types of Corporate Structure

U.S.A.- pioneer for startups. More independent of management. More flexible. Reflects the culture of U.S.A. Number of board members differ according to the country.

Historical Legal Landmarks

Takeover Eras Santa Clara V. Southern Pacific Railroad Stock Market Crash-1929 Securities Act -1933 Securities Exchange Act -1934

Takeover Eras
Hostile Takeover The Poison Pill The White Knight Corporate Raiders

Hostile Takeover
One company attempts to gain power over the other without creating an agreement. The aggressor company purchases a high enough percentage of the companys shares to gain a controlling interest over it. Push the former board members out of their positions.

The Poison Pill

The shareholders purchase the surplus stock. Try to prevent a hostile takeover. Flood the market with shares in order to defeat the aggressors attempt to acquire a majority. Sometimes the shareholders may believe that the corporation would be better in the hands of the aggressor company.
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The White Knight

An alternative purchaser who enters the bidding for shares. Either they will acquire the corporation themselves, or boost up the value of the stocks for those who want to sell.

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Corporate Raiders
Acquisition of large volume of shares. The intention may not be to purchase the company, the raiders may want to gain a controlling interest.

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Santa Clara V. Southern Pacific Railroad

Court case between Santa Clara V. Southern Pacific Railroad (1886) established the legal designation of corporations as similar to persons. Due to this ruling that corporations are considered legal, fictional beings that have the same rights and abilities under the law as do humans.
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Santa Clara V. Southern Pacific Railroad

Was a United States Supreme Court case dealing with taxation of railroad properties. At the California Constitutional Convention of 1878-79, the state legislature drew up a new constitution that denied railroads "the right to deduct the amount of their debts from the taxable value of their property, a right which was given to individuals."
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Santa Clara V. Southern Pacific Railroad

Southern Pacific Railroad Company refused to pay taxes under these new changes. The taxpaying railroads challenged this law, based on a conflicting federal statute of 1866 which gave them privileges inconsistent with state taxation.

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Stock Market Crash-1929

Result of corporate corruption. Great depression. High unemployment and low economic activity. Investors lost trust in public markets. A bear market followed the Wall Street Crash of 1929.

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Securities Act -1933 Securities Exchange Act -1934

Passed to create tighter regulations on corporate activities. Protect the public from corrupt behavior. Securities Exchange Act of 1934 established the Securities and Exchange Commission to oversee the acts implementation.

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Securities and Exchange Commission

To regulate the corporate activities through policy development, compliance guidance and information gathering. Protect shareholders from corruption. All publicly traded companies have to submit specified information regularly.

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Corporate Scandals
Insider Trading Inaccurate financial reporting The Sarbanes Oxley (SOX) Act passed.

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Insider Trading
"insider" is any person who, is or was connected with the company, and who is reasonably expected to have access to unpublished price-sensitive information about the stock of that particular company, or who has access to such unpublished price sensitive information.

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Albert H. Wiggin: The Market Crash Millionaire

Wall Street professional in the 20s. Albert H. Wiggin, the respected head of Chase National Bank, seemed an unlikely target until it was revealed that he shorted 40,000 shares of his own company. Built up a position that gave him a vested interest in running his company into the ground. Legally made $4 million from the 1929 crash

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Martha Stewart
In December 2001, the Food and Drug Administration (FDA) announced that it was rejecting ImClone's new cancer drug, Erbitux. Among those with a preternatural knack for guessing the FDA's decision days before the announcement was homemaking guru Martha Stewart. She sold 4,000 shares when the stock was still trading in the high $50s and collected nearly $250,000 on the sale. The stock would plummet to just over $10 in the following months. Sent to prison and fined.

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Sarbanes Oxley (SOX)

Passed in 2002. Protect investors. Greater transparency. Standards for executives, accountants and auditors. Created the Public Company Accounting Oversight Board (PCAOB) to govern the corporate activities.
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