Why Large Public Companies Shouldn't Hate Sarbanes-Oxley
Chowdhury, Shamsud D., Ivey Business Journal Online
Sarbanes-Oxley may be onerous, tedious and expensive. But it is also - and arguably the most important overlooked thing - a virtual and heretofore never-considered ally of corporate managers. In fact, as this author argues, learning to live with Sarbanes Oxley can yield unanticipated dividends and make a manager's life a lot easier.
Since its passage in 2002, the Sarbanes-Oxley Act (SOX) of the United States has generated a great deal of controversy. Proponents maintain that it did not go far enough to curb agency problems and restore shareholder confidence in the governance of large public corporations. Critics contend that it has gone too far, is complicated, confusing and, most importantly, very costly to execute. In this article, I argue that the benefits from the compliance of SOX should outweigh, at least in the long-run, its associated costs. The essence of my argument hinges on how SOX compliance serves as a proxy for the key components of strategy implementation- a job inherently complicated and expensive-but instrumental in the eventual success of a corporation.
The critics speak
Following its establishment in the United Kingdom in 1991, the Cadbury Commission issued a report entitled, Cadbury Committee Report: Financial Aspects of Corporate Governance in the UK, in 1992. Sir Adrian Cadbury, former chairman of Cadbury Schweppes and an ardent proponent of stringent measures to curb executive wrong doings became a synonymous with corporate governance reform. An offshoot of the Cadbury Commission, the Cadbury Report aimed at improving the perceived low level of confidence in financial reporting and in the ability of auditors to provide safeguards to the users of company reports. Sir Cadbury's most notable achievement, the Cadbury Code, represents a highly codified set of recommendations of the Cadbury Report, which got immediate acceptance in about 50 countries. Not surprisingly, say some observers, the Cadbury Commission's 19 recommendations for stricter and more effective governance of British public corporations culminated in the passage of SOX in 2002.
The SOX of 2002 represents perhaps "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt" [http://www.sec.gov (accessed May 5, 2006]. Once admired for their enviable track record, a few household names such as Arthur Anderson, Enron, Hollinger International, Tyco and WorldCom became synonymous with executive corruption, scandal and greed. In response, on July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The essential reforms brought about by SOX include, among other things, accounting oversight, auditor independence, disclosure, analysts' conflict of interests, accountability for fraud, and attorney's responsibilities. Without question, these reforms have significant ramifications not only for the public and private corporations in the US, but also for the corporations of other countries transacting with US firms, Canada included.
Below, I offer a brief overview of the criticism that has frequently been labeled against SOX, followed by an explanation of how this is related to corporate governance and strategy. Then, I present a strategy implementation model that shows how SOX compliance serves as a proxy for the basic levers of strategy implementation. Because these levers are inherently expensive, compliance with SOX may offset a great deal of costs associated with strategy implementation. I conclude on a high note, that compliant firms can turn the burden of SOX into a source of competitive advantage by integrating the Act's relevant provisions into their routine strategy implementation process.
The most frequently heard criticism of SOX is that complying with it is time-consuming and costly, particularly for relatively small public corporations. However, the most serious criticism is directed at three sections-404, 406, and 409-under Title IV: Enhanced Financial Disclosures. …