The Sarbanes-Oxley Act and the Making of Quack Corporate Governance

240 Pages Posted: 27 Sep 2004 Last revised: 3 Feb 2023

See all articles by Roberta Romano

Roberta Romano

Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: September 25, 2004

Abstract

This paper provides an evaluation of the substantive corporate governance mandates of the Sarbanes-Oxley Act of 2002 that is informed by the relevant empirical accounting and finance literature and the political dynamics that produced the mandates. The empirical literature provides a metric for evaluating the mandates' effectiveness, by facilitating identification of whether specific provisions can be most accurately characterized as efficacious reforms or as quack corporate governance. The learning of the literature, which was available when Congress was legislating, is that SOX's corporate governance provisions were ill-conceived. The political environment explains why Congress would enact legislation with such mismatched means and ends. SOX was enacted as emergency legislation amidst a free-falling stock market and media frenzy over corporate scandals shortly before the midterm congressional elections. The governance provisions, included toward the end of the legislative process in the Senate, were not a focus of any considered attention. Their inclusion stemmed from the interaction between election year politics and the Senate banking committee chairman's response to suggestions of policy entrepreneurs. The scholarly literature at odds with those individuals' recommendations was ignored, while the interest groups whose position was more consistent with the literature - the business community and accounting profession - had lost their credibility and become politically radioactive. The paper's conclusion is that SOX's corporate governance provisions should be stripped of their mandatory force and rendered optional. Other nations, such as the members of the European Union who have been revising their corporation codes, would be well advised to avoid Congress' policy blunder.

Keywords: corporate governance, corporate law, securities regulation, Sarbanes-Oxley Act

JEL Classification: K22, G34

Suggested Citation

Romano, Roberta, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance (September 25, 2004). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 52/2004, NYU Law and Economics Research Paper No. 04-032, Yale ICF Working Paper No. 04-37, Yale Law & Economics Research Paper No. 297, Available at SSRN: https://ssrn.com/abstract=596101 or http://dx.doi.org/10.2139/ssrn.596101

Roberta Romano (Contact Author)

Yale Law School ( email )

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