Quick Regulatory Compliance often results in Quack Governance.
CoIn 2005, Roberta Romano, from The Genius of American Corporate Law fame, timely and rightly described the Sarbanes-Oxley Act (SOX) as “quack corporate governance.” Since then the virtues of SOX has played a significant corporate governance (G) role in reforming the company's internal controls and more central role in restructuring Risk Management (R); from the nature and description of SOX findings in counseling the directors and senior managers on the potential risks and even more important role in modernising compliance (C); from fear of the policeman (jail and fines). After the financial crisis the components of GRC is used to address complex global GRC issues and add values and ethics by integrating GRC in business processes to monitor transparency, ownership, accountability and to create awareness of the business ideals and standards of ethical and professional conduct.
Most companies and managers believe that GRC has increased shareholder value and wealth. Implementing GRC is a learning process and a journey that requires the confirmation at the top of the corporate pyramid. As the various components of GRC unfold, executives find that there is still much more work and processes that need to be in order, because GRC issues become more complex and with complexity, there are unintended consequences.
However, there seems to be an overall trend, that after each major corporate and financial crisis of the last century the federal governments galvanize into action, hijack the legislative framework and respond to the crisis to include most of the below mentioned quack GRC attributes;
There are 3 identifiable attributes of quack corporate governance based on the manner in which new regulation are:
- The new law is often enacted hurriedly in response to a major negative economic event, becoming what is often called a bubble act. Typically, the regulatory compliance components are not a novel proposal, but rather a synopsis of non-compliant past laws.
- It is enacted in a crisis environment. Consideration is primarily given as a response of a populist backlash. The result is often against corporations and/or markets. Strong interest groups have a field day because it includes longstanding agenda item of some powerful interest group(s).
- The monitoring and oversight powers are transferred to local authorities without issuing proper definitions, explanations or guidance. The empirical evidence cited in support of the regulatory proposal is, at best, customized to fit the political sentiment mixed with populist elect.
Example of quack corporate governance
A recent example is the Dodd-Frank’s executive compensation provisions, an enactment strongly supported by institutional investors. Say on pay is a longstanding institutional investor agenda item. The EU commission has later also followed the same trail and decribed in detail in this newsletter: A common EU approach to say on pay for all types of listed companies. Also revisit our article on Say on Pay earlier this year: http://www.copenhagencompliance.com/news/issueVI/news-10.php
And finally to conclude this article in a positive note please revisit our tribute to 10 years SOX anniversary with 10 positive elements of SOX, the primary accomplishment being: There is a whole lot of GRC reforms that Sarbanes-Oxley has put into operation: http://www.copenhagencompliance.com/news/SOX10Years.php
Source: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1673575
