Corporate Governance Changes in the Wake of the Sarbanes-Oxley Act : A Morality Tale for Policymakers Too

This paper seeks to draw a lesson for designing major reforms of corporate governance in the future. It recalls the key events leading to the recent seismic shift in corporate governance policies applicable to American public corporations, and identifies the four sources of policy changes - the Sarbanes-Oxley Act, new listing requirements, governance rating agencies, and tougher judicial opinions (notably in Delaware) about perennial corporate governance issues. It presents a synthetic overview of the numerous reforms, which at the most general level aim to fix the audit process, increase board independence, and improve disclosure and transparency. It pauses to identify the vast territory of unchanged corporate governance rules that are still left to state law, and then examines some of the empirical studies that bear on whether the governance reforms can be confidently predicted to have strong positive results for investors. The exercise suggests an irony: Studies about the impacts of the most costly reforms, those concerning audit practices and board independence, are fairly inconclusive or negative, while studies about proposals for shareholder empowerment and reduction of managerial entrenchment indicate that changes in these areas - which in general are only atmospherically supported by the SOX-related changes - could have significant positive impacts. Admittedly, the general evidence for mandatory disclosure does suggest that the new round of enhanced disclosures, which are only moderately costly, will have good effects.The concluding section presents and explains a new approach for the next crisis-generated reform movement. It is based on the notion that bandwagons are unavoidable, but their motivating impact can be leveraged and their bad effects alleviated by good statutory design. In particular, legal reforms in the area of corporate governance should have bite but should also be explicitly structured to authorize and mandate (1) serious empirical study of the effects of particular regulatory changes (or existing rules), (2) periodic reassessment of regulations in light of such evidence (while also considering experience and analytical arguments, of course), and (3) explicit decisions to reaffirm or alter regulations in light of these reassessments