Sarbanes-Oxley and the Reinvention of Corporate Governance (Symposium: Enron)
The Sarbanes-Oxley Act (the Act), signed into law by President Bush in July 2002, creates the need to re-think the way we approach our study of corporate governance in two ways and has the potential (depending upon the results of, and actions taken in response to, various studies that are required to be completed under that Act during the next year) dramatically to change the way we think about, write about and teach corporate law. The Act makes three specific changes in the way we think about corporate governance: first, it brings into the realm of internal governance the gatekeepers that once stood outside the box, including auditors, analysts and lawyers. Second, it significantly enhances the legal status of, and centrality of corporate governance to, the chief executive officer and the audit committee, two constituents that have received very little recognition in the law and its literature. Third, both in doing this and in other respects (like the prohibition of loans to officers and certain other conflict of interest transactions), it federalizes an important dimension of the internal laws of corporate governance, creating a new (albeit arguably narrow) duty of care for the CEO and audit committee and reintroducing serious prohibitions on conflict of interest transactions that have eroded to nothingness in the hands of the Delaware judiciary and legislature.
In Part I, I set the background of the traditional roles of the gatekeepers now to be brought within the gates. Part II explains how the Act and the regulations link up these gatekeepers with aspects of corporate governance traditionally treated as internal to the corporation and their potential effects on corporate governance. The message is that it is finally time for scholars of corporate governance to look inside the corporate box, not just at the structure, in order to understand and evaluate the important linkages between outside parties, corporate structure and actual corporate behavior. Part III concludes with a more detailed examination of the ways in which the Act has the potential to defeat the hegemony of finance over business and, in the process, reverse the ethic of stock price shorttermism to long-run business management, as well as the ways in which this not only will benefit corporations and their shareholders but their constellation of constituents as well.
These insights are necessarily speculative. The Act is new. Regulations are in the process of being adopted. We have hardly begun to sort through the various causes of the corporate crisis of 2002. Moreover, corporate managers, investment bankers, accountants and lawyers have shown themselves to be enormously adept at evading the substance of regulation even as they may comply with its form. In the absence of detailed regulation and vigorous enforcement, the Act could turn out to be so much sound and fury signifying nothing. I therefore present these observations in the spirit of suggesting what the Sarbanes-Oxley Act can be at its best. Whether in practice it achieves these results remains to be seen.