The 1970s: The Committee on Corporate Laws Joins the Corporate Governance Debate

By Small, Marshall L. | Law and Contemporary Problems, Winter 2011 | Go to article overview
Save to active project

The 1970s: The Committee on Corporate Laws Joins the Corporate Governance Debate

Small, Marshall L., Law and Contemporary Problems


The 1970s decade--like the decade now ending--was marked by a number of corporate scandals. The decade was ushered in by the revelation of the Watergate break-in and its aftermath. Watergate was followed by disclosures of numerous cases of bribery of foreign officials, leading eventually to the enactment of the Foreign Corrupt Practices Act in 1977. (1) The decade was also marked by other types of questionable payments by publicly held corporations, both in the United States and overseas, leading to a series of enforcement actions by the Securities and Exchange Commission (SEC) that resulted in consent decrees. (2) These revelations stimulated a vigorous debate in Congress, the federal regulatory agencies, the academic community, the organized bar, public interest groups, and the business community, as to how publicly owned corporations should be governed to prevent corporate misconduct, and to enhance oversight of the corporation, with some suggesting that corporation law should be federalized. (3)



The role of the corporate director--particularly the non-management director--became a focus of attention in this ongoing debate. Although there had been a marked increase in the number of manufacturing corporations whose boards of directors contained a majority of non-management directors--from 63% in 1967 to 83% in 1977 (4)--at the start of the decade, the non-management director was often not regarded as playing an active governance role. A survey of board of directors' practices and procedures of twenty-five large, public corporations, published by the General Counsel of General Electric Company in December 1969, disclosed that only about fifty percent of those corporations ever sent out advance notice to their directors of the agendas for board meetings. (5) This view of the passive nature of non-management directors was also reflected in an influential book published in 1971 by Myles Mace, a well-known professor at the Harvard Business School. (6)

Existing legal standards similarly reflected the view that directors (particularly non-management directors) were not expected to be proactive. In the leading Delaware Supreme Court case of Graham v. Allis-Chalmers Mfg. Co., the court held that directors of a large, public company were not expected to be aware of, or take action to guard against, anti-trust violations by subordinates. (7) It would be another thirty years before the Delaware Chancery Court reexamined the Allis-Chalmers decision in In re Caremark Int'l, Inc. Derivative Litigation and recognized a duty of directors to monitor the affairs of corporations. (8) It would be still another ten years before the Delaware Supreme Court endorsed the Chancery Court's decision in Caremark, holding that the necessary conditions predicate for director oversight liability were either (1) an utter failure to implement any reporting or information system or controls; or (2) having implemented such a system or controls, conscious failure to monitor or oversee its operation, thus disabling themselves from being informed of risks or problems requiring their attention. (9) However, during the 1970s, such a duty of directors to monitor was not generally recognized by courts. (10)

In the face of widespread disclosure of corporate misconduct, the SEC, under the chairmanship of G. Bradford Cook, undertook to prepare a position paper on the responsibility of directors. However, this effort was later abandoned by his successor as chairman, Ray Garrett, Jr., as being unworkable. (11)



A. Model Act Revisions

In 1973, the Committee on Corporate Laws (Committee) entered the intense debate about the role of corporate directors by establishing a panel on the functions and responsibilities of directors. (12) The initial task of the panel was to consider sections 35 and 48 of the Model Business Corporation Act (MBCA), dealing with the board of directors and liabilities of directors.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

The 1970s: The Committee on Corporate Laws Joins the Corporate Governance Debate


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?