The Sarbanes-Oxley Act and the Making of Quack Corporate Governance
Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
June 1, 2005
Yale Law Journal, June 2005
Yale ICF Working Paper No. 05-23
This Article provides an evaluation of the substantive corporate governance mandates of the Sarbanes-Oxley Act (SOX) of 2002 that is informed by the relevant empirical accounting and finance literature, and of the political dynamics that produced the mandates. The empirical literature provides a metric for evaluating whether specific provisions can be most accurately characterized as efficacious reforms or as quack corporate governance. The learning of the literature, much of which was available when Congress was debating the bill, 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 amid a free-falling stock market and media frenzy over corporate scandals shortly before midterm congressional elections. The governance provisions, introduced 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 the suggestions of policy entrepreneurs. The scholarly literature at odds with those individuals' recommendations was not brought to Congress's attention (and was ignored on the rare occasions that it was referenced).
The pattern of congressional decisionmaking in SOX is not, however, unique. Much of the expansion of federal regulation of financial markets has occurred after significant market turmoil. The Article concludes that SOX's corporate governance provisions should be stripped of their mandatory force and rendered optional. To mitigate future policy blunders on the scale of SOX, it also suggests that emergency or crisis-mode legislation provide for reevaluation at a later date when more deliberative reflection is possible.
Number of Pages in PDF File: 91
Keywords: Sarbanes-Oxley Act, corporate governance, corporate law
JEL Classification: K22, G34, G38
Date posted: August 22, 2005 ; Last revised: November 11, 2011