Managerialism, Legal Ethics, and Sarbanes-Oxley Section 307

Abstract:     
Prepared for a conference on the Sarbanes-Oxley Act (a.k.a. the "Public Company Accounting Reform and Investor Protection Act" of 2002), this Article focuses on the professional responsibility rules promulgated by the Securities and Exchange Commission under Section 307 of the Act. According to the theoretical model of corporate governance espoused by all business corporation statutes, a corporation is to be run by its board of directors for the benefit of its shareholders. In practice, however, corporations frequently are run by their top managers for the benefit of those managers.

A number of recent trends have empowered boards of directors vis-a-vis management. As this Article's review of the statutory text and its legislative history demonstrates, Congress intended the Sarbanes-Oxley Act to further that trend. We further demonstrate that Section 307 should be understood as part of the Act's overall anti-managerialist intent. Congress sought to enlist legal counsel in strengthening the board. Specifically, Congress directed the SEC to create an up the ladder reporting requirement pursuant to which a firm's legal counsel would report evidence of misconduct to the board of directors, thereby redressing one of the information asymmetries between boards and managers.

This Article argues that, as a normative matter, Sarbanes-Oxley Section 307 was well-intentioned. As a practical matter, however, Section 307 seems unlikely to effect significant changes in corporate governance. In our view, the nature of legal practice, the largely unchanged relationship between lawyers and managers, and the problematic approach taken by the SEC to implementing Section 307 suggest that the new legal regime is unlikely to result in significantly better information flows within the corporate hierarchy.

Keywords: board of directors, corporate governance, legal ethics, managerialism, securities regulation

JEL Classifications: K22

Accepted Paper Series