Sarbanes-Oxley, Fiduciary Duties, and the Conduct of Officers and Directors
52 Pages Posted: 30 Jul 2004
Date Written: July 28, 2004
Abstract
This article analyzes and evaluates the Sarbanes-Oxley Act and related legal changes and speculates as to how they are affecting director and officer conduct. On paper, the legal changes are notable but not earthshaking. A standard law and economics approach would suggest that changes in conduct should be relatively modest. Actual changes in conduct seem to be greater than the standard approach can explain, for two reasons. First, people are often subject to cognitive biases. The great attention paid to recent scandals and Sarbanes-Oxley, combined with a tendency to over-emphasize small risk and recent events, may be provoking an over-reaction to a perceived legal threat that in actuality is quite probably small. Second, Sarbanes-Oxley is helping strengthen a norm of active, independent director supervision of officers which was already emerging before the Act. In focusing on the effect of the law on norms, the paper emphasizes that corporations control agency costs and misbehavior not just through monitoring mechanisms, but also through self-control mechanisms that depend on agents obeying their fiduciary duties because they believe it is the right thing to do, rather than because they fear punishment if they do not.
Keywords: Sarbanes-Oxley, fiduciary duty, officers, directors, agency
JEL Classification: G30, K22, L20
Suggested Citation: Suggested Citation