For all its noble intentions, the five-year-old Sarbanes-Oxley Act prompts many complaints from the corporate community. It has been blamed (wrongly, in most cases) for prompting companies to shun public listings in New York. Executives complained about the cost of compliance, and the potential for liability. Then they turned around and decided it wasn’t so bad after all.
Now, two academic studies commissioned by the American Enterprise Institute conclude that SOX, as it’s fondly known, has reduced the corporate risk-taking that produces economic growth. One study led by Professor Kenneth Lehn at the University of Pittsburgh compared 4000 US companies with close to 1000 similar companies in the UK , concluding that the U.S. players were more risk-averse.
The second paper, by Professor Katherine Litvak of the University of Texas Law School, will be presented at the AEI on September 28. Litvak compares about 1000 pairs of companies, each including a foreign company with U.S.-listed shares (thus bound by U.S. law). It also concludes those subject to SOX are more risk-averse than similar companies.
Why is this alleged to be the case? The AEI’s main message seems to be that empowered, independent boards have reduced the discretionary authority of executives. It’s much easier to have your way when your pals or business partners have a seat in the boardroom. (A) They’re less likely to stop you. (B)They’re less likely to kick you out if things go wrong.
What intrigues me is whether the apparent reduction in risk taking will translate into reduced profits for shareholders over the long term. That conclusion would certainly fit with the mission of the AEI, a conservative think tank that pushes for, among other things, limited government. But corporate executives also talk about the benefits they have seen from better financial controls and governance. Big risks can translate into big profits but they can also create big blow-ups. It’s interesting to see how the prognosis on SOX’s impact continues to evolve.
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