Sarbanes Oxley at 15: The Success of 'Quack' Corporate Governance

Abstract

At the 15th year anniversary of Sarbanes Oxley, the label of “quack” corporate governance proved incorrect. SOX succeeded in putting in place mechanisms that promoted investor confidence by raising the quality of financial disclosure. The legislation did so in a number of innovative ways. A regulator was created to oversee public company accounting firms but, rather than add another government agency, Congress assigned the task to the Public Company Accounting Oversight Board, a non-profit corporation overseen by the Securities and Exchange Commission. Congress strengthened the role of the gatekeeping function of the board of directors, primarily through listing standards applicable to audit committees. Boards were encouraged to add financial expertise through a system of “comply or explain,” something widely used in Europe but, until SOX, not in the US. Information flow to the board was increased and companies had to put in place mechanisms designed to allow employees to make confidential complaints to the audit committee about concerns over financial disclosure. Audits quality was improved and officers were made more responsible for financial disclosure through certification. Concern with the public securities markets has again arisen, with blame placed on SOX and other forms of regulation. Some have pointed to a reduction in the number of IPOs and the presence of a large number of unicorns (companies with a value of more than $1 billion) that have chosen to remain in the private equity markets. Calls have arisen to further restrict the requirement that outside auditors “attest” to a public company’s internal controls and to restrict the use of Rule 14a-8 by shareholders. Both proposals, however, are misplaced. Unicorns have a number of reasons for delaying IPOs. The strength of the private markets provides a degree of flexibility over the timing of public offerings that did not exist in earlier eras. Moreover, with the prevalence of dual class stock structures, founders, rather than private equity funds, likely have greater say over the timing of a public offering. The public markets can always be improved. The strength of the markets is transparency and transparency arises through disclosure. Investors could benefit from an improved system of disclosure. Reform should address both the method of filing and accessing information as well as the contents of disclosure. Much of the system of disclosure has been in place since the 1980s, before anyone had heard of the Internet, much less social media or artificial intelligence. In doing so, however, the focus should not be on disclosure overload but on disclosure effectiveness.