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Feature
Call Me a SOX Skeptic When it comes to regulating corporate governance, the ‘magic of the marketplace’ will work just fine, thank you.We are in the midst of an unusually rapid expansion of federal involvement in corporate governance. As a long-term corporate director, I feel impelled to report a personal attitude that departs considerably from the views that we economists hold on the subject of regulation. Just for the record, I have devoted a substantial portion of my academic research to evaluating the impacts of regulation on American business, especially manufacturing. Early on, I advocated the introduction of benefit/cost analysis to screen proposed regulations. This approach enables the analyst to take an ostensibly neutral position, giving equal weight to the benefits and the costs. I did learn that, if you are in the middle of the road, you will be hit by traffic going in both directions. As a board member, however, I instinctively view regulatory requirements in a negative light -- as an annoying and unhelpful intrusion. Having led the ouster of the CEOs of two large companies, I may have a different view of the boardroom than others. Surely, there are serious matters that directors face in dealing with the chairman and the management -- especially when the two roles are combined. My point is that I do not find government officials helpful in that process. Surely, if the requirements imposed by Sarbanes-Oxley (SOX) result in substantially greater confidence in the financial reporting of American business, the results may well justify the added costs being imposed. I remain a skeptic, however, because I believe that the Enron experience had a greater -- and more positive -- impact. Indeed, Enron continues to be a presence in many boardrooms today. No director wants to suffer the fate of the Enron directors who were tossed off other boards just because they wore the Enron badge of shame. Advocates of more governmental intrusion in corporate governance tend to ignore the demonstrated ability of private enterprise to reform itself. As I recall, the initial requirement for a board to have an audit committee of outside directors came not from the governmental securities regulators but from the New York Stock Exchange. Also, following substantial criticism, most boards of larger corporations voluntarily shifted their composition to a heavy majority of outside (albeit not necessarily independent) directors. Regulation frequently generates adverse side effects, and SOX is no exception. Several foreign companies have taken action to avoid the hidden tax imposed by the new statute. They have done so by withdrawing their shares from trading in the United States and also have withdrawn their registration with the SEC. Perhaps a far greater side effect of the recent expansion in regulation of corporate governance is the tendency of some companies to go private. Also, some investment advisers urge their wealthy clients to avoid serving on corporate boards. Their concern relates to the rising liability facing directors. This situation is compounded by a loophole in the normal regulatory review process. Like other independent regulatory commissions, the SEC is exempt from the requirement for federal agencies to do a benefit/cost analysis prior to promulgating a new regulation. Hence, there may be more than a remote possibility that the costs imposed by the regulations issued pursuant to SOX exceed the benefits generated. Some indirect evidence is provided by the studies of the relationship between board composition and company performance. These studies in general do not support the implicit assumption underlying SOX. There is no impressive body of evidence demonstrating that outside directors enhance company performance. Perhaps that should not be surprising. After all, Enron’s board likely met the SOX requirements with flying colors. To complete this analysis, I submit that one of the lessons learned from earlier regulatory statutes is that, sooner or later, companies learn how to adjust to and comply with regulatory requirements. They build such compliance into their operating procedures. Like any other cost it faces, management tries to minimize it and sometimes learns how to get around the law and regulations. This leads us to affirm the powerful and well-recognized role of financial markets in disciplining corporate decision-making. Does the overall process of relying primarily on the pressures of the market work effectively? The answer is clear. Compare the performance of American business with that of other advanced industrial economies. Over the years, we outperform Western Europe and Japan -- in production, profitability, and job creation. It is a tribute to what Ronald Reagan called “the magic of the marketplace.” |
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| Murray
Weidenbaum is the Mallinckrodt Distinguished University Professor at
Washington University in St. Louis, where he is also honorary chairman
of the Weidenbaum Center on the Economy, Government, and Public Policy.
A longer version of this article appears in the First Quarter 2005
edition of Directors & Boards. Copyright © 2005 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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