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

Companies can create a subcommittee of the board of directors to deal with legal compliance. After the final Sarbanes-Oxley regulations, the Securities and Exchange Commission (S.E.C.) predicted that 11% of 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. It emphasizes the resistance of general counsel to board involvement with legal compliance. 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. 100 new QLCC's were created at investment funds and trusts in the year ending September 20, 2005. 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