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The Sarbanes-Oxley Act and the Making of Quack Corporate Governance

2005; The Yale Law Journal Company; Volume: 114; Issue: 7 Linguagem: Inglês

1939-8611

Roberta Romano,

Auditing, Earnings Management, Governance

This Article provides an evaluation of the substantive corporate governance mandates of the Sarbanes-Oxley Act of 2002 that is informed by the relevant empirical accounting and finance literature and the political dynamics that produced the mandates. The empirical literature provides a metric for evaluating the mandates’ effectiveness by facilitating identification of 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 legislating, 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 amidst a free-falling stock market and media frenzy over corporate scandals shortly before the midterm congressional elections. The governance provisions, included toward the end of the legislative process in the Senate, were not a focus of any considered * Allen Duffy/Class of 1960 Professor of Law, Yale Law School; Research Associate, National Bureau of Economic Research and Fellow, European Corporate Governance Institute. Earlier versions of this article were presented as a plenary lecture at the 20th Annual Conference of the European Association of Law and Economics, the Matthews Lecture at the University of Mississippi School of Law, the Harald Voss Memorial Lectures at the Institute for Law and Finance of Johann Wolfgang Goethe-Universitat in Hamburg, the Vienna University of Economics and Business Administration and UNCITRAL Forum fur Internationales Wirtschaftsrecht in Vienna, the University of Pennsylvania Institute of Law and Economics Roundtable, the Centre for European Policy Studies Roundtable on Corporate Governance Reform in the EU, the Kirkland & Ellis, LLP Corporate Law & Economics workshop, and workshops at the University of Chicago, Columbia University, University of Denver, University of Iowa, University of North Carolina, and University of Virginia Law Schools. In addition to participants at those presentations, I would like to thank Jennifer Arlen, John Core, Alan Gerber, Marcel Kahan, Jonathan Macey, Paul Mahoney, and Mathew McCubbins for helpful comments.