Resistances to Reforming Corporate Governance: The Diffusion of QLCC's

Abstract:     
Companies can create a subcommittee of the board of directors to deal with legal compliance. Sarbanes-Oxley regulations provide that issuers who form a legal compliance committee that meets certain qualifications are protected from lawyers either revealing information or challenging corporate actors regarding corporate legal violations or breaches of fiduciary obligations. The Securities and Exchange Commission (S.E.C.) predicted that 3,620 issuers would form Qualified Legal Compliance Committees (QLCCs).

Between October 2002 and 30 September 2005, 456 issuers formed QLCCs. More than 97% of issuers do not have one and less than 13% of those the SEC predicted would form one have done so. In the third year since its introduction, one-quarter as many operating companies formed QLCCs as did so in the previous year. Based on interviews and a review of published accounts, this article tells the story of the failed diffusion of this organizational innovation.

Although the diffusion of QLCCs has been very slow at operating companies and appears to be slowing, this pattern is not replicated at investment funds and trusts. Of the total of 456, 100 new QLCC's were created at investment funds and trusts in the third year. The increasing use of QLCCs at investment companies is consistent with the explanations that I propose for their lack of diffusion at operating companies. Employment patterns (and agency costs) differentiate Investment funds and trusts from operating companies.

Keywords: compliance, corporate governance, mutual funds, chief legal officer, board of directors, Sarbanes-Oxley, S.E.C., managerialism, regulation, regulatory compliance

JEL Classifications: D23, G24, G38, J44, K22, K42, L14, L21, L84, M14

Accepted Paper Series