July 31, 2017

Sarbanes-Oxley Turns 15! We Get Personal

It’s hard to believe that Sunday was the 15th anniversary of SOX. Around here, we aren’t just dwelling on the “Sarbanes-Oxley Blues” – we’re also sharing personal reflections on the landmark law. Here are mine:

I was a college junior when Enron & WorldCom imploded & my accounting friends lost their Arthur Andersen offers. Despite massively changing the oversight framework for financial reporting, I don’t recall SOX being discussed in my business classes – or during my following years in law school.

When I became a bright-eyed law firm associate, it felt like SOX had always existed. The rules seemed natural to me: Why wouldn’t the CEO & CFO read SEC filings & certify their accuracy? Why would anyone other than independent directors oversee financial reports? Is there anything more suspenseful than monitoring the 404(b) phase-ins & exclusions – a tradition that lives on even today?

I’m more realistic after 10+ years of explaining – and helping in-house counsel explain – the reasons for SOX & related rules to execs who weren’t always keen on “independent oversight” or “transparent disclosure.” This EY memo suggests that financial reporting has improved. But executives continue to gamble with misleading & opaque financial calculations – and it’s clear that SOX didn’t save us from a “check-the-box” mentality. We keep playing the same game by different rules – forgetting the main principles.

Broc’s 10¢ on Sarbanes-Oxley

Broc has these five random thoughts about Sarbanes-Oxley:

1. I never liked calling it “SOX” – and I really disliked those that called it “Sar-Box.”

2. As I’ve blogged before, Sarbanes-Oxley was somewhat of a surprise at the time because the legislative bill seemed dead. Then WorldCom collapsed & Congress passed the legislation in a hurry. In this blog, Lynn Turner notes that there was some thought put into the bill.

3. It’s interesting to recall what the top issues were initially. In August 2002, the biggest concern involved CEO/CFO certifications and the mechanics of how those newfangled things worked, which really weren’t fully ironed out for several months. With a smile, I remember the chaos as I put together a last-minute teleconference regarding certifications (just two-days notice) and we had an incredible turnout as the first batch of certs were due to be filed the next week. It was wild, man. Better than Woodstock.

Can you imagine that internal controls were nowhere on the radar screen at the time? In fact, my March 2003 webcast on the topic (which I appropriately labeled then as a “sleeper,” thanks to a memorable conversation with John Huber) remains the most sparsely-attended webcast I have held in my 15 years of hosting them. Look back at the law firm memos drafted right after SOX was passed and you will not find anyone predicting that Section 404 was something formidable. That was because we all only had the bandwidth to tackle the numerous new requirements that were applicable immediately – and Section 404’s implementation seemed so far away.

4. Sadly, Mike Oxley passed away a few years ago. It was a thrill to interview Mike at our conference. A true gentleman. You could see why the people in his hometown voted him into Congress. Mike had six “hole-in-ones” during his lifetime. Six!

5. Way back then, I light-heartedly created a character named “Billy Broc” Oxley in jest. Dave was “The Animal” Sarbanes. We made short funny videos for a feature called “The Sarbanes-Oxley Report.” My favorites remain “Bad Hair Day” – and “Billy Broc’s Dream.” The margins were fabulous…

John’s 10¢ on SOX

John has these random thoughts about Sarbanes-Oxley:

Enron, WorldCom, Tyco – I can remember when these were some of the most respected and admired companies in America. I think that’s what made the corporate scandals of the first years of the 21st Century so shocking. These guys were the bluest of the blue chips, and the revelation of their greed and corruption was a cold slap in the face to investors and ordinary Americans. The scandals fundamentally changed the way a lot of people thought about American corporations and those who ran them.

And that begat Sarbanes-Oxley, an entirely necessary statute for which I have no love whatsoever. Yes, corporate governance changes had to be made, and there’s a lot – particularly in the area of internal controls – that Sarbanes Oxley set in motion that has benefitted corporations and investors. But a big price has been paid too.

The exponential growth in demands made on directors in the name of “good governance” has left them with less and less time to focus on the business. Boards have become more bureaucratic and internally focused. Consultants and governance experts have multiplied. Corporate governance flavors of the month have proliferated and become “must haves.” Disclosure documents have become increasingly full of trivial information that’s costly to generate.

Too often, I think, investors and companies have drunk the Kool-Aid without really examining the underlying principles. For instance, I wonder, in 50 years, if people will still think it was a good idea to require a majority of the board of the world’s largest corporations to be comprised of outsiders, with no prior experience in the company’s business? In an environment where directors who make compensation decisions are only liable for “waste”, is 40 pages of executive comp disclosure really good for much more than providing CEOs with a chance to pour over competitors’ disclosures and come up with a detailed wish list of their own?

And don’t get me started on the Governance Industrial Complex. . .

But in the end, corporate tool that I am, I still have to concede that Cassius was right – “the fault, dear Brutus, is not in our stars, but in ourselves.” We’re sleeping in the bed that we made.

Liz Dunshee