Kevin B. Rollins

In July 2002, Congress passed the Sarbanes-Oxley Act ostensibly to restore investor confidence in securities markets and corporate financial disclosure following the scandals involving Enron and WorldCom. Whether the scandals fomented wide-spread uncertainty among investors or whether congressional action actually helped to bolster confidence as promised remains unclear, however, and opponents charge that Sarbanes-Oxley has increased corporate costs but has done little to strengthen corporate governance.

Congress claimed that a significant loss of investor confidence demanded new regulation to ensure the integrity of corporate financial statements. At a May 5 AEI conference reviewing Sarbanes-Oxley, AEI's Peter J. Wallison recalled, however, that while the corporate scandals had very little effect on markets, the stock market dropped 282 points the day the Senate passed Sarbanes-Oxley and 700 points when the president signed the bill into law. If investor confidence had truly been shaken, one would have expected the stock market to rise with the promise of new regulation. Instead, Wallison argued that corporate scandals shook confidence among politicians and the media, not among investors.

Sarbanes-Oxley urged greater board independence, yet Sanjai Bhagat of the University of Colorado found that companies moving toward greater independence did not necessarily enjoy increased profitability. Bhagat advocated the board membership of company executives on the grounds that they may more easily be judged as potential CEOs if they serve as directors, they generally make better-informed strategic investment decisions than independent directors, and they have stronger motivation than independent directors since their own money is at stake. Jeff Sonnenfeld of the Yale School of Management added that corporate reliance on inexperienced, marquee names can be risky and that the character of the directors counts far more than their independence.

AEI trustee Kevin B. Rollins, president of Dell Inc., contended that while Sarbanes-Oxley highlighted legitimate concerns regarding corporate governance, success ultimately depends upon a corporation's ability to earn the trust of its stockholders by maintaining integrity at all levels. Shareholders need to be able to trust the accuracy of financial data and know that directors run the business with their best interests at heart. Whereas corporate ethics programs often come across as "window-dressing," Rollins cited Dell's strict code of conduct and its Global Ethics Council as consistently measuring the ethics of its corporate leaders. According to Rollins, greater transparency and accountability will bring to light the practices of those corporations trying to do things the right way, as well as those using accounting tricks to mask financial difficulties.

Sarbanes-Oxley has greatly increased some corporate costs since becoming law. Tom Hartman of Foley & Lardner noted that legal fees have undergone double-digit increases since its passage, and the cost of public relations, as well as investor relations, has also risen dramatically. Cono Fusco of Grant Thornton LLP blamed the passage of Sarbanes-Oxley for a 30-percent increase in the number of companies seeking to privatize.  In his view, these companies are reacting to sharp increases in administrative costs, external consulting and software expenses, auditor attestation fees, and the response of capital markets to identifying significant deficiencies and material weaknesses in corporate accounting.

Grace Hinchman of Financial Executives International analyzed the costs associated with Section 404 of the Act, which deals with management assessment of internal controls. She showed that companies expect to add an average of twelve thousand internal and three thousand external hours annually to insure compliance, to pay an additional $590,000 in auditor fees (an increase of 38 percent), and to add $700,000 worth of software and IT consulting as well.

The panelists agreed that Sarbanes-Oxley has thus had little real effect on investor confidence despite establishing greater federal oversight of corporate governance, but has dramatically increased the costs of compliance for public corporations.