Today marks the anniversary of an important landmark in the development of good corporate governance practices. On January 23, 1895 the NYSE first required its listed companies to issue financial statements to shareholders. Up until that time, no one required what we now consider a fundamental shareholder right – to have a full accounting of a company’s finances.
If you read the resolution carefully, you’ll see that the NYSE’s action was not so much a requirement as a recommendation. Lacking the force of law, the NYSE encouraged companies to adopt such disclosure practices in their “listing agreements,” as a condition of having the company’s securities traded at the NYSE. Young industrial companies were more eager to agree to the requirements, while older established entities were less so.
A little prehistory: Before the Civil War, the NYSE had few criteria for listing a company’s shares on the exchange. In 1866 the NYSE established the Committee on Stock List to take charge of admitting new securities to its market – marking the beginning of the NYSE’s efforts to apply its listing policies in the interests of the investing public.
Listing requirements developed in the form of agreements between the Exchange and the listed company. One of the first came in 1869 when the Exchange asked its companies to register their shares at a bank or trust company to avoid diluting shareholder value through unauthorized issues of additional shares – a practice called “watering stock.” Subsequent milestones include requirements on shareholder voting rights (1926), outside directors on corporate boards (1956), independent audit committees (1977), and a host of others.
The first company to comply with the annual report recommendation was the Kansas City Gas Company (its successor is today a division of Southern Union Company, NYSE:SUG). n 1897 it promised that it would “make publication of its net profits not less than twice in each year.” Over the next couple decades this recommendation evolved into an outright requirement, and publication of annual reports became a universal practice among NYSE-listed companies.