"CHANGING CONCEPTS OF BUSINESS ETHICS AND THE RESPONSIBILITIES OF BUSINESS ADVISORS"
THE OPENING PAGES OF THIS SPEECH AND OTHERS, GIVING A PERSONAL IMPRESSION OF RAY GARRETT, JR., HAVE BEEN GRACIOUSLY PROVIDED BY HARVEY L. PITT.

An Address by
Ray Garrett, Jr., Chairman
Securities and Exchange Commission

Presented before
THE AMERICAN BAR ASSOCIATION NATIONAL INSTITUTE
Waldorf-Astoria Hotel
October 3, 1974
New York City

The program for this Institute listed four of the Institutes organized by our Section, and they showed somewhat more of a pattern than I had remembered. The first -- which, I believe, was the first national institute put on by an ABA section, after the old regional meetings were abandoned in favor of this sort of thing -- was on the then recent decision of Judge McLean in the Bar Chris case. Neil Kennedy, of loving memory, was asked if he could think of anything to get the national institute program moving, and he supposed that he could assemble a respectable group to discuss Bar Chris, even on short notice.

In those days -- with so many working on '33 Act registration statements, conscious of working on too many too fast, and secretly feeling a bit guilty about it, but getting away with it, so it seemed, and the paucity of decisions under Section 11, none really probing the painful depths of due diligence in detail -- Bar Chris was a bomb that sent tremors all through the Street, the board rooms, and the accounting and legal professions. The result was a land office business for the institute. Over a thousand worried lawyers and other journeyed into the Grand Ballroom of the Waldorf for two and a half days of exposition and speculation on that one opinion.

We may never top the opener, as they say in show biz. We may match the crowd some day, but possibly never the aggregate anxiety packed into one room. It produced some memorable moments. Milt Freeman disposed of the whole matter neatly He said, "The lesson of Bar Chris is clear. Never work on the registration statement of a company that goes broke the next year." Al Sommer awakened the pretty jaded Saturday morning assemblage by opening his remarks at a time when the horse was long since dead by comparing himself to the fifth husband of a much-married movie star who observed on his wedding night that he knew what to do but didn't know how to make it interesting -- a joke that I have heard more often than I have cared to since then.

The event is also memorable to me for a more private happening. On the first night of the Institute, a Thursday, I had got mixed up with bad company -- old friends who were determined not only to dine well but thereafter to remake the world, or at least that part of it within reach, which was a lot. In consequence, on Friday morning, I did not feel like an Eagle Scout eager to be first at Reveille. But I made it, got through my modest bit, and sat down to relax, watch the other fellows work, and contemplate the promised coffee break. When the break came, dear, sweet Neil Kennedy, who was presiding that morning, came quietly over, put his hand on my shoulder in that palsy way that always starts my adrenaline, and let me have it. "Ray, old buddy," purred Neil, "I've got to leave to get out to my son's graduation. You take over." Well, I did, and we made it to lunch, when there was a changing of the guard. It was at lunch that it occurred to me that Neil had known for about three years that he couldn't stay in New York City until noon on that day. Funny he hadn't mentioned it before.

I won't forget our first Institute.

After this came institutes on Officers' and Directors' Responsibilities, Corporations under Attack, and Revolution in Securities Regulation. There have been some others -- highly successful -- on other subjects, but this is a fair concentration on corporate problems. But not technical problems. It has been a more searching concern. They have not been devoted to how to accomplish a three-cornered merger where state law does not permit it, or how to get rid of non-redeemable preferred stock with accrued and unpaid dividends -- the sort of really meaty stuff that we corporate lawyers love. Rather they have been devoted to a deeper examination of the role of the business corporation in our society than we have been accustomed to or than lawyers generally feel comfortable with.

There has been a neck-saving and hide-protecting aspect to this, and properly so. Lawyers must pay some attention to their own well being and search the boundaries of threats to the economic security of themselves and their families. But it would be a gross disservice to the intent of the earlier institutes and of this one to take this as the sole or even dominant focus of attention. While no human being -- which, despite our detractors, includes a lawyer -- can ignore the brooding omnipresence of possible liability for money damages in crushing amount -- I believe the primary thrust of these institutes has been, and is, to get a clearer view of what society, and the law, expects of lawyers, accountants, other advisors to corporations as well as corporate officers and directors.

Attitudes have, indeed, been changing. I am reaching the age where I enjoy putting down younger men by observing, whenever I can, which is most of the time, that whatever idea they come up with is not really new. Someone thought it and gave voice to it before. It is, of course, usually the fact. Virtually every criticism now being made of our business corporations and every suggestion for change can also be found in the voluminous reformist literature of the past century or more. But, while this is an interesting observation, it is little more than that. It is trite today to repeat Everett Dirksen's remark about an idea whose time has come*, but the significance of ideas does not vary as much according to their logical validity as their popular acceptance. When someone today urges consumer, conservationist, or labor representation on the board of directors, for example, it is no answer to point out that this was suggested by a French philosopher in the 1890's and rejected. It is not being entirely rejected today. The widespread discontent with the behavior of much of modern business is leading to a reexamination of the legitimacy of corporate ownership and management and the premises that guide its content.

There is a degree of anomaly in the modern, publicly-held corporation. It is surely an institution that would never have been invented by anyone setting about the plan the organization of a society and its economic activities. He would, no doubt, have invented business units under common management and directed to a more or less specific productive or distribution function. The Soviets, for example, have found something like a corporation essential to organize and accomplish steel production, et cetera, but obviously not with stock ownership and the theoretical devotion of management to the monetary interests of the stockholders.

To persons who don't like the way business is behaving it is frustrating to discover that so much of it is conducted by a normally self-perpetuating management claiming to derive its authority from, and to be guided by the welfare of, a large and ever-changing mass of stockholders, most of whom management never sees or wants to see, or could see if it did want to.

Consider this imaginary dialogue.

The environmentalist says to the large steel company , "Stop polluting the lake."

And the steel company says, "We'd like to, but it would be expensive and reduce the profits of our owners."

The environmentalist says, "Go ask the owners. Maybe they would forego some profit for the sake of a clean and healthy lake."

And management says, "We doubt it, but anyway the owners are 100,000 names in the computer. We don't know them. We don't even know the real names of many of them. And they are changing all the time."

The environmentalist, not to be put off so easily, says, "Well, put it to a vote."

And management replies, "It wouldn't do any good, at least unless we got 100% approval, which is impossible. We can't even get 100% of our stockholders to answer their mail or cash their dividend checks."

"Why do you need 100%?"

"Because, the fundamental presumption is that we will operate their business to make a profit for the owners, that is, the stockholders. Our stockholders have invested in the business of making steel, not cleaning up lakes. For us deliberately to engage in a nonprofit activity would be inconsistent with that presumption."

"Not everything you do makes money or is even intended to make money."

"Not in itself, that is true, but it is intended to contribute to the overall profitability of the enterprise. Show us that cleaning up the lake will be to the long-range benefit of our stockholders and we will consider it."

"Suppose people stopped buying your steel because you are a dirty polluter. Or suppose polluting was made illegal and your company would be fined and you would go to jail."

"Either of those eventualities would have a persuasive effect."

My little dialogue illustrates, more or less, two thrusts of reform. Ever since Berle and Means discovered that most of our large corporations are not managed by the owner [editor's note: they wrote The Modern Corporation in 1932, a classic], there has been a reformist movement toward making the non-owner managers more responsive to the owner-stockholders. The temptation is great for management to operate the business for its own pleasure and profit, and pressures must be applied to encourage management to resist the temptation. The problem is as old as the days of the chief stewards of medieval manors, and wealthy Roman landowners probably suffered from it as well. It is naturally exacerbated when the owner is not a mighty baron who can descend upon the thieving steward from time-to-time and boil him in oil when appropriate, but is rather an amorphous and ever-changing mass of unknown people....

*[editor's note: At the vote for closure on the filibuster against the 1964 Civil Rights Act, Dirksen had this to say "Victor Hugo wrote in his diary substantially this sentiment, 'Stronger than all the armies is an idea whose time has come.' The time has come for equality of opportunity in sharing of government, in education, and in employment. It must not be stayed or denied."

The origin of the quote is actually: "An invasion of armies can be resisted, but not an idea whose time has come." from Victor Hugo's 'Histoire d'un crime,' 1852]

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