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Wrestling with Reform: Financial Scandals and the Legislation They Inspired

Three Approaches, One Law: Foreign Corrupt Practices Act of 1977

Landmark Corporate Governance Reforms

Congress chose none of the plans. Senator Proxmire’s bill passed the Senate unanimously, but died in committee in the House due to accounting industry opposition and the “lateness of the session.” The administration’s proposals also drew fire. Democratic Presidential candidate Jimmy Carter said they would “allow corporations to engage in bribery so long as they report such illegal transactions to the Department of Commerce.” ⁽²²⁾ With widespread support, the SEC continued to oppose expansive new legislation.

Carter’s victory in 1976 made Proxmire’s bill the likely vehicle for reform. But before Congress could act, the SEC set its own course. Chairman Hills wanted “an internal reporting system” reliant on “independent directors, outside auditors and outside counsel.” At the SEC’s request, the New York Stock Exchange added independent audit committees to its listing requirements. The American Institute of Certified Public Accountants produced new accounting standards, which Hills considered to be the basis of modern corporate governance. SEC officials believed that they had taken adequate steps to remedy the payments problem.

As Proxmire’s bill stalled over “minor criticisms,” SEC Commissioner John Evans urged the SEC to use its administrative powers to enforce the “substance” of the proposals. The SEC proposed rules reflecting these goals, supplemented by disclosure requirements aimed at management. Later in the year, under new SEC Chairman Harold Williams, a routine review of proxy rules escalated into a full-scale review of corporate governance, with nationwide hearings clearly intent on increasing shareholder influence. ⁽²³⁾ In the following years, the SEC raised disclosure requirements for independence of directors, demanded more information on audit, nominating, and compensation committees, and reformed proxy rules. Thus, the payments scandal and the legislative response produced parallel and unexpected administrative reforms.

Commerce Secretary Richardson understood that the Proxmire bill had “a great deal of superficial appeal” and would likely remain the vehicle for reform. In January 1977, Senator Proxmire reintroduced his bill, now cautiously supported by the Carter Administration. ⁽²⁴⁾ While maintaining that SEC proposals were sufficient, Chairman Williams preferred the Senate bill to a more limited House measure. In May, the Proxmire bill passed the Senate; by July, the Carter Administration was fully behind it. After ironing out accounting provisions acceptable to the industry, Congress passed the law unanimously in December.

The Foreign Corrupt Practices Act of 1977 concluded what the New York Times called “one of the worst scandals in the history of modern international business.” It placed a $1 million penalty on firms convicted of bribery abroad, provided smaller penalties and jail time for individual officers, and implemented the accounting, record-keeping, and governance provisions requested by the SEC. ⁽²⁵⁾ Nearly three-and-a-half years after the initial scandals, Congress, the SEC and two administrations had collaborated to produce workable legislation and landmark corporate governance reforms.

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Footnotes:

(22) Washington Post, “Mr. Tanaka and Lockheed,” August 21, 1976.

(23) Washington Post, “SEC Proposes Rules to Help Stop Hiding of Questionable Payments,” January 20, 1977. New York Times, “Washington & Business: Making SEC Listen to the Public,” September 29, 1977.

(24) New York Times, “Blumenthal Sees No Use in Stock Bill to Identify Owners,” March 17, 1977.

(25) New York Times, “Senate Backs Foreign Bribery Bill,” December 7, 1977.