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Chapter 9. Corporate Governance and Regulation since the Civil War
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C h a p t e r 9 Corporate Governance and Regulation since the Civil War No legislation can wholly prevent the evils and dangers so often complained of. Foolish people cannot be legislated into common sense, nor can reckless speculation be entirely prevented by the wisest laws. . . . No penalties can be imposed by law which will compare in efficiency with the common instinct of self-protection. —Henry Hitchcock, 18871 Traditional criticisms of the corporation survived the Civil War and apparently intensified over time.2 In 1873, James A. Garfield told the student body of Hudson College that business corporations were a threat to the republic because “the vast powers of the railroad and the telegraph, the great instruments by which modern communities live, move and have their being” were “owned and managed as private property, by a comparatively small number of private citizens.” The future president also reminded his listeners of the agency problems confronting large corporations. “The great managers,” he noted, “have in many cases grasped the private property of the corporations themselves; and the stocks which represent the investment have become mere counters in the great gambling houses of Wall street.”3 Fifteen years later, a jurist noted that a “general prejudice against corporations” was apparent. “It is almost a proverb,” he claimed, “that juries find against them whenever opportunity offers.”4 That was certainly untrue in the antebellum period, when juries often found in favor of banks, insurers, and utilities.5 Stockholder monitoring of their investments did not end with the Civil Regulation since the Civil War 193 War. In 1870, stockholders ousted almost the entire board of directors of the Pepperell Manufacturing Company because of a scandal involving the company ’s sales agent. In 1881, some British investors published a pamphlet lambasting Franklin Gowen, former head of the Philadelphia and Reading Railroad. The pamphlet purported to show Gowen’s “unspeakably bad finance , his incapacity to deal safely with figures, the desperate expedients to which he will resort, his utter want of accuracy, his habit of quarrelling with and abusing his opponents, and his proneness to rely on wild and fantastic estimates.”6 In 1907, the New York Times noted that Dutch investors were able to “upset the old and somewhat inefficient management of a railroad in the Southwest.”7 Nevertheless, during and after the Civil War, state-centered regulation of corporations began to play an ever larger role, until by the late nineteenth century, Americans, in the words of James Bryce, had “grown no less accustomed than the English to . . . the action of government.”8 While most Americans remained skeptical, some began to believe that government regulation sounded “well” in some economic areas, such as railroads and other public utilities, labor relations, and food and drug quality. One important issue was discerning in which types of business competition was a sufficient regulator and in which types companies enjoyed enough natural market power to require regulation.9 After 1900, governments increasingly regulated information disclosure and other topics traditionally in the purview of corporations. First came state-level securities statutes called Blue Sky Laws, which regulated the sale of corporate securities; then came several New Deal acts that closely regulated securities issuance and information disclosure and that radically transformed the banking system. Many such regulations were justified by the erosion of the governance checks and balances common in the postbellum period, especially the decline in stockholder rights, in the words of corporate scholars Adolph Berle and Gardiner Means, “from extreme strength to practical impotence .”10 Ironically, many of the new regulations furthered the ascendance of corporate executives over stockholders and other stakeholders without adequately controlling corporate behavior.11 “It would be easy,” wrote one postbellum jurist, “to point out . . . patent defects in the general incorporation laws of the various States. Some consist in the ill digested and patch-work character of the law itself, the result of piecemeal and frequently inconsistent legislations; others in the lack of uniform requirements . . . others in wholly insufficient and defective provisions for enforcing or supervising the fulfillment of the statutory requirements; others in the unrestrained permission to [34.204.177.148] Project MUSE (2024-03-28 17:10 GMT) 194 Chapter 9 create mortgage and floating debts . . . others in the lack of precaution against the issue of stocks or bonds without real and adequate consideration.”12 Separation of Ownership and Control and the Erosion of Traditional Governance Checks and Balances No such check or guard exists or can exist in a . . . company...