Double Standards for Corporate Governance
Byline: Tony Edwards and Judith Elgood
Recent high-profile corporate collapses, notably Enron and WorldCom, have put the spotlight on corporate governance issues. In the UK, the Higgs and Smith reports, published last month, proposed significant revisions to the UK Combined Code on corporate governance while the US has responded with the Securities and Exchange Commission issuing its rules in the form of the Sarbanes-Oxley Act 2002.While the dynamics of the global marketplace suggest that we will see a greater convergence of corporate governance regimes across the world, the UK code has evolved over the years through the systematic development of regulation. This process has required numerous reports following consultations with practitioners, regulators and government. In stark contrast, the US act has been rushed through - this has shown itself most clearly in the number of amendments and revisions that have occurred since it became law. Should Sarbanes-Oxley, therefore, form the new model on which the global economy and, more specifically, the UK bases its corporate governance regime?
There is a clear dichotomy in the US and UK responses. The UK code applies only to companies listed in the UK and those traded on the Alternative Investment Market. However, the Sarbanes-Oxley Act does not distinguish between US and non-US companies. It applies to companies whose securities are listed on US stock exchanges or which have made registered securities offerings in the US, regardless of where those companies are incorporated.
Where the existing code in the UK operates a "comply or explain" regime, giving flexibility to a company's board of directors to "state you have complied or, if not, why not and for what period", the US act has imposed a mandatory regime that includes Draconian measures.
Public companies are under obligation to adopt codes of ethics for senior financial officers and rotate the audit partner responsible for reviewing the audit every five years and the lead audit partner; the provision by auditors of various non-audit functions is prohibited, and there are specific new and increased criminal penalties for knowingly tampering with or falsifying documents with the intent to obstruct or influence an investigation, which could result in fines and imprisonment for up to 20 years.
The mandatory nature of the US act means some provisions are unduly restrictive in situations where no real mischief would necessarily arise were a company to be in breach. The numerous new criminal offences created by the US act may be seen as helpful deterrents against boardroom malfeasance by some, but they may deter talented individuals from becoming directors. …