**3. From 1929 crisis up to 1970s**

The 1929 crisis turned explicit some problems that were being overlooked by investors and shareholders. It showed that capital market was developed enough to receive more attention by government authorities. During the 1920s, millions of people invested their fortunes in stock market and lost great part of it. Public have lost confidence on capital market and by this time, it constituted an important financial source for economy. It was urgent to restore investor confidence on it [14].

In 1932, the first big corporate scandal was Kreuger & Toll, the king of matches that used subsidiaries transfers to avoid taxes and diffuse the lack of asset given as collateral for multiple loans, exceeding the credit limit. Discovered after Kreuger death, this scandal attracted press and U.S. Congress interests. Something should be done regarding securities, corporate structure, accounting and auditing [9, 15].

By 1933, it was approved the Securities Act that required that investors should receive true financial information and prohibit fraud, indicating civil liabilities and penalties to false communication [16]. To empower this Act, by 1934, it was created the Securities and Exchange Commission—SEC [17], providing regulation and control over transactions in securities, as they constitute a national public interest. Besides the law, 1934 Act created a regulatory authority that required periodical information and had disciplinary powers over companies registered there.

One of the SEC first requirements was for disclosure of executive pay. In 1929, private information about the excessive salary and bonus of Bethlehem Steel president came to public and outraged them. Both were substantial higher than a management compensation considered good on that moment. This kind of incentive became a public interest since then [13].

Creative accounting has been used for many purposes as to avoid taxation, to issue new shares, to distribute more dividends, etc. (e.g. [10]). Many authors studied the motivation for it (e.g. [11]), but it is not the focus here. In synthesis, creative accounting has been used to hide poor performance or failure, to boost the economic performance or to perpetrate a corporate

When industrial revolution created companies big enough to require investment from diverse sources and could not be managed by their owners anymore, two main mechanisms were developed to mitigate the agency conflicts: the executives compensation plan and boards monitoring role. Compensation and bonus plans started to be developed as a rational way to pay managers for working in the best interest of owners. The outcomes-based incentives turned to be an important mechanism used by firms to align interests between agents and principles [12, 13].

When economy is in expansion phase, it is more difficult to pay attention to red flags. But financial crises play an important role to improvements on corporate control. The next sections were separated by main financial crises that promoted a worldwide injures and changes

It is worth to point out that although the same problems have been occurred in all parts of the world, many events commented here were placed in the United States, as its consequences affect a great number of people and markets and usually drive the main changes on legisla-

The 1929 crisis turned explicit some problems that were being overlooked by investors and shareholders. It showed that capital market was developed enough to receive more attention by government authorities. During the 1920s, millions of people invested their fortunes in stock market and lost great part of it. Public have lost confidence on capital market and by this time, it constituted an important financial source for economy. It was urgent to restore

In 1932, the first big corporate scandal was Kreuger & Toll, the king of matches that used subsidiaries transfers to avoid taxes and diffuse the lack of asset given as collateral for multiple loans, exceeding the credit limit. Discovered after Kreuger death, this scandal attracted press and U.S. Congress interests. Something should be done regarding securities, corporate struc-

By 1933, it was approved the Securities Act that required that investors should receive true financial information and prohibit fraud, indicating civil liabilities and penalties to false communication [16]. To empower this Act, by 1934, it was created the Securities and Exchange Commission—SEC [17], providing regulation and control over transactions in securities, as they constitute a national public interest. Besides the law, 1934 Act created a regulatory authority that required periodical information and had disciplinary powers over companies

fraud over investors [9].

26 Corporate Governance and Strategic Decision Making

on governance.

tion, enforcements and practices worldwide.

**3. From 1929 crisis up to 1970s**

investor confidence on it [14].

registered there.

ture, accounting and auditing [9, 15].

In order to avoid unrealistic bonuses, many firms adopted performance-based compensations. This mechanism should avoid paying high bonuses when things are going bad. It is supposed to avoid moral hazard [6]. The principal wants to expend as little money as possible and get as much effort as he can from agents. Agents want to expend as little effort as possible for getting as much money as they can. Performance-based incentives would align these opposed interests. Notwithstanding, this performance-based incentives shifted the risk from shareholders to managers. Their perception of compensation risk (and personal wealth) led to the intensification of earning manipulation practices [12, 18, 19], or at least induced dysfunctional results, as this perception also depends on measurement systems covering and the level of supervision control [20]. Managers misrepresented financial reports in order to inflate company stock prices and other compensation-related metrics [21].

As capital market turned complex, other laws were being approved like ones to regulate debt securities (1939), investment companies and investment advisory (1940) [14]. All these laws can be seen as adaptation to market environment but one of them deserves a commentary.

In 1940s, a graduated income tax structured was implemented in the USA and affected mainly the senior executives. To avoid it, many others non-cash compensation was developed, as deferred compensation and stock options [13]. In 1950, the Revenue Act allowed that income tax would be applied over gains when shares were sold, creating the figure of restricted stock options. The era of compensation has started. Despite other tax code changes along time, this kind of compensation continued to be used. Stock-based compensation is consistent to agency theory and was seen as a governance mechanism to discourage misrepresentation [19]. Empirical studies, however, present different evidences that testify this hypothesis (e.g. [22]) and that refute it for some types of stocks (e.g. [12]).

Economy was growing in the 1960s thanks to a huge explosion in technology, and executives were willing to participate in this. Stock options were then the main instrument used to do it, but Senator Albert Gore started a campaign to eliminate the tax advantage of them. In 1970s, there was a stagnant economy in function of oil crisis and unemployment. In this context, restricted stock became more popular as share was to be paid out over three to five years depending on financial performance or other goals. At this time, options were not seen as a motivation for short-term performance and main as a retirement and long-term saving plans [13].

Although accounting for options had been raised on 1950s as the use of this instrument was intensified, the first accounting rule about it was only issued in 1972. The APB n° 25 was an opinion issued by the predecessor of Financial Accounting Standard Board (FASB)—the Accounting Principles Board (APB). This opinion specified the intrinsic value method for valuing stock options (quoted market prices—exercise price), and this net value should be expensed. As companies made the exercise price equal to the quoted market price, the intrinsic value was zero, and it seemed that APB n° 25 did not require options to be expensed [23–25] and so was mere figurative enforcement.

In 1973, it was founded the Chicago Board Options Exchange (CBOE) and stock options started to be negotiated in a more regulated basis. At the same time, it was published the Black-Scholes method for valuing options [26], which turned to be the most widely used model. Despite a more precise method for valuing options, they were not yet recognized by accounting rules and were not registered.

In 1976, Congress finally repealed the 1950 rule that had sheltered stock options from tax [24].
