Realizing the Dream of William O. Douglas - the Securities and Exchange Commission Takes Charge of Corporate Governance

Abstract

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) has markedly changed the boundary between the federal securities laws and state corporation law with regard to corporate governance. This change has not been some accident of hasty congressional action in the wake of the Enron, Worldcom and related scandals. The added grants of authority given to the SEC in Sarbanes-Oxley are with respect to matters of board composition and structure that the SEC has been angling to regulate for some time. Furthermore, in utilizing the self-regulatory organizations to implement the new governance ideas of Sabanes-Oxley, the SEC has exercised its powers under the 1975 amendments to the Securities Exchange Act of 1934 in a manner long considered questionable. The SEC's new activism with respect to corporate governance can thus be analyzed as the latest maneuver in a long running battle between federal and state authorities over the regulation of public corporations. Whether Sarbanes-Oxley will result in better corporate governance and greater sensitivity by corporate officers and directors to investor interests remains to be seen. Despite the laudatory goals of the statute, adverse consequences are possible. The provisions of Sarbanes-Oxley are proscriptive in an area where flexibility has long been valued. Furthermore, it is premised to some extent on an adversarial model of corporate governance in contrast to a consensus model which has been the prevailing norm in boardrooms. In changing the orientation of directors, Sarbanes-Oxley and its implementation by the SEC may result in diminished entrepreneurial activity, corporate profitability and competitiveness. The new emphasis on investor protection may detract attention from long-term business interests. This shift from state to federal law concerning internal corporate affairs may also cause state law either to become unduly restrictive of directorial discretion in an effort to compete with rigorous SEC enforcement cases, or at the other extreme, to atrophy.

Keywords: Sarbanes-Oxley, federal securities law, state corporation law, governance, SEC, activism, Delaware, Journal, Corporate, Law