It's one cycle investors can count on: After every crash comes reform.
It happened in 18th-century Britain after the collapse of the South Sea Bubble. It happened in early 20th-century America after revelations of corporate corruption and again, with a vengeance, after the 1929 crash.
Not surprisingly, reformers are gearing up again to repair Wall Street. The only question is whether investors are mad enough this time to generate far-reaching reforms or only limited ones.
So far, Congress has passed limited changes, mostly on accounting issues. But with corporate America on the defensive, some ethicists want to limit executive pay and make boards more independent from management. Liberal reformers hope to ride investor discontent farther, expanding financial disclosure to include a closer look at environmental and labor activities.
It's not clear how much momentum these fractured movements can generate. But a key shareholder victory last fall, federal reforms about to kick in, and a level of reformist activity not seen in years all have put wind in their sails.
"It's my belief that this is the year we're going to see investors stand up and get counted," says Tim Smith, senior vice president at Walden Asset Management and president of the Social Investment Forum, a trade association for socially concerned investors.
One reason hopes for reform look so good is that stock performance in the past three years has looked so bad.
Wall Street's debacle - along with a string of revelations stretching from shady accounting practices to outright fraud - caused Congress to pass the Sarbanes-Oxley Act last year.
Now, the Securities and Exchange Commission is finalizing the rules, which reduce conflict-of-interest problems for accounting firms and tackle other accounting issues.
Activists who want to take bolder steps are buoyed by a historic victory of a shareholder resolution last November. Typically, social and environmental resolutions are symbolic events. They don't succeed if management opposes them. But at its annual meeting last fall, CBRL Group (which owns Cracker Barrel Old Country Stores) agreed to write into its employment policies an explicit ban on gay discrimination.
The move came after the nondiscrimination measure garnered 58 percent shareholder (including proxy) approval - the first time a social-issue resolution opposed by management has ever won a majority in the United States. Reformers hope the vote will energize shareholders at other companies to challenge management.
"There's a psychological hurdle or barrier that's been overcome," says Meg Voorhes, a director at the Investor Responsibility Research Center in Washington, D.C. "It makes it easier."
So far this year, shareholders have proposed even more resolutions for corporate annual meetings - 926 - the highest in at least six years, Ms. Voorhes says.
Nearly a third of those resolutions would limit compensation for executives, including stock options, whose abuse at some corporations has caused widespread anger among investors.
Other investors are taking their grievances to the courts. Last year, they filed 224 class-action suits against a wide range of corporations from WorldCom to Tyco International, according to a new study by Stanford Law School Securities Class Action Clearinghouse.
That's nearly a third more than the previous year's total and the highest since 1998, when investors filed 238 such suits.
Reformers may get another boost from the Securities and Exchange Commission this year. It ordered that, starting in July, mutual funds will have to disclose how they vote on proxies at the companies whose shares they own. Some reformers see this as a major step forward.
"What's radical about this is that, for the first time, it's going to be possible for stakeholders to lobby the people who actually own and invest the shares of the corporation," says Peter Kinder, cofounder of KLD Research & Analytics, the Boston consulting firm that created the Domini index of socially responsible firms. "This is not shareholder but stakeholder democracy."
Not everyone agrees. "Social activism is fine, but stockholders have their money spread out all over the place" when they invest in mutual funds, says Diane Swanson, professor of management at Kansas State University in Manhattan, Kan. "A lot of times [the activists] are not acting for any one interested group of people."
Some critics dismiss the socially responsible investing movement as a throwback to '60s liberalism.
"No one takes it seriously in the business-ethics community," says Jon Entine, adjunct scholar at the American Enterprise Institute and scholar in residence at Miami University in Oxford, Ohio. The activists "are really just seen as gadflies on social issues."
Some business ethicists want to see more concrete action in limiting executive pay and severing the tie between political campaigns and corporate contributions. "I was hoping the corporate scandals would be a wake-up call," says Professor Swanson. "But I'm not sure I'm seeing it."
Many investment professionals don't want to see it. Instead of the crash pushing much-needed reform, they worry about the opposite - a return of the anti- business climate of the 1970s.
Instead of worrying about multiple stakeholders, companies should concentrate on maximizing their long-term value for shareholders, says Bill Nygren, manager of the well-regarded Oakmark and Oakmark Select mutual funds.
"By maximizing the long-term value ... doing the right things socially all fall in to place," he adds.
For example, treating workers correctly will attract a quality labor force and pay long-term dividends, he says. And the markets are already forcing companies to disclose more information.
"Yes, regulators are calling for it, but companies are providing it even before they're required to," Mr. Nygren says. "We've seen tremendous increase in voluntary disclosure."
Ultimately, how long the window of reform stays open will probably depend on the performance of Wall Street.
"Bursts of new regulation follow market downturns," says Stuart Banner, a law professor at the University of California at Los Angeles and author of a 1998 history of American and British securities regulation. But "when the stock market is doing well, we tend to tolerate a lot more."
As in, a lot more shenanigans.