Responsibilities of Corporation Directors

April 10, 1939

Report Outline
Inactive and Working Directors
Control of Corporations
Conflicts Between Directors and Stockholders
Corporation Directors and Management
Special Focus

Inactive and Working Directors

On March 22, the Securities and Exchange Commission published its findings and opinion in the matter of Interstate Hosiery Mills, Inc. The Commission severely criticized the management of the company for failure to discover serious falsifications in the accountants' records which were used by the directors in their annual reports to stockholders. This case has again emphasized the dangers of perfunctory action by corporation directors which were extensively discussed in connection with the McKesson and Robbins scandal last autumn.

In previous years the annual stockholders' meetings of large corporations, most of which are held in April, have frequently been the occasion for protests by individual stockholders against policies of management and directors, but such protests have merely served to stress the weak position of a minority owner of corporation securities. At the annual stockholders' meeting of the United States Steel Corporation on April 3, J. Newcomb Blackman, a stockholder and vice president of the American Federation of Investors, appeared to protest against the fact that owners of common stock have received only $1 in dividends in seven years, and he urged “collective bargaining for stockholders,” telling the directors that unless the stockholders' interests were better protected “there will be no good jobs for you fellows and certainly no more capital made available for investment.”

The S. E. C. opinion in the Interstate case said: “It is difficult to excuse Interstate's management which, over a period of four years, passed unquestioned a series of financial reports containing gross overstatements of cash, accounts receivable and inventory amounting in the end to $234,234.22, $701,938.74, and $904,358.41.” These overstatements were included in balance sheets approved by the directors for submission to stockholders, and the balance sheet for the year 1937 containing the cumulative total errors had been tentatively approved before the falsifications were accidentally discovered.