New at Reason

Julian Sanchez | January 19, 2006

Brian Doherty talks with four corporate finance experts about how Sarbanes-Oxley is affecting American business.

Comments

Dave W.|1.19.06 @ 10:14AM|#

Sarbanes-Oxley wouldn't have happened if executive salaries hadn't gotten so disproportionate compared to the salary of an average worker.

I wonder if SarbOx is driving up relative executive compensation even further.

My suspicion is that it is not because the job market for executives is not a true market. In other words, I think they found a guy to replace the Outback guy at similar or less compensation, despite the added margin of yuckiness that is SarbOx liability. I tried to RTFA, but too much complaining for my tastes. So maybe the Outback guy said who replaced him, I don't know. I do know that if they posted the job and salary in an ad in the WSJ, they would get plenty of qualified applicants, SarbOx or no SarbOx. TVT (Tiny Violin Time)

|1.19.06 @ 10:31AM|#

Best reason article ever.

|1.19.06 @ 10:44AM|#

SOX has nothing to do with executive compensation, Dave. Its provisions apply whether your CEO makes $100,000 or $100 million.

|1.19.06 @ 10:47AM|#

I don't know enough about SarbOx to have a strong opinion (and no doubt somebody will read too much into that fact), but when I was teaching at a private college the management used that law to justify just about anything. A typical faculty meeting exchange would be:

Instructor: "Why is the school doing [insert dumb idea here]?"

Provost: "Um, well, as a publicly traded company we have certain obligations under Sarbanes Oxley...."

I have no doubt that there are legitimate criticisms to be made against it, but I thought it was funny the way that our provost just sort of used it as a blanket excuse. I was waiting for him to use it to explain why the copy machine was broken.

|1.19.06 @ 10:48AM|#

"Wilson: SarbOx is definitely discouraging smaller companies from going public, and it discourages good opportunities for investing in little companies. I have friends running private companies who say going public now would be just impossible."

I think this is the most underreported part of the story. In Hernando De Soto's book he claims that the poverty of third world nations is due to the fact that their property laws makes sure that people cannot capitalize or monetize their holdings. This creates dead capital and restricts wealth creation. This is the true unseen effect of Sarbanes-Oxley. We are creating dead capital we this law.

|1.19.06 @ 10:53AM|#

The company I work for just went public last year. Ever since, our dedicated compliance person (lucky her!) has been asking me strange questions about my usage of certain computer applications. Since I'm a programmer, I use many internal applications to test my work. I do not use them to produce revenue or interact with the outside world in any way. Yet, because the applications are installed on my computer, I have to be reported to the government.

|1.19.06 @ 10:59AM|#

The biggest laugh is that government agencies (mine included - we would fail in seconds) are totally exempt from this encumbering piece of crap.

Dan T.|1.19.06 @ 11:13AM|#

So corporations don�t like Sarbanes-Oxley? Stop the presses! Who would have seen that coming?

Dave W.|1.19.06 @ 11:33AM|#

Phil,

I never said SarbOx was rational or a good law. I am reserving final judgement on it, but it does seem like a bad law. I still believe that it would not have been passed had executive compensations not skyrocketed and stayed up as a recession made things tough on the rest of us. So I am saying that SarbOx was likely an emotional overreaction to a failure in the executive pay "market."

However, (and this should surprise my regular readers) I don't think the government should worry about this kind of market failure because, as the article points out, investors are sophisticated and have the power to fix things up if and how they want to. In other words, I have no sympathy for overpaid execs crying all the way to the bank, but I also have pretty much no sympathy for SarbOx itself either.

I have been accused of backing the tort law system out of economic self-interest as a lawyer. However, I think the last lawfirm I worked at made a lot more off SarbOx than tort law,* and yet I come out against SarbOx somehow. So hopefully my credibility is high here as I am apparently going against biases that others claim to perceive in my writing.


FOOTNOTE
* Personally I didn't do either tort work or SarbOx compliance, so I don't think I have a particular bias.

|1.19.06 @ 11:55AM|#

I never said SarbOx was rational or a good law.

Nor did I say you did.

I still believe that it would not have been passed had executive compensations not skyrocketed and stayed up as a recession made things tough on the rest of us.

SOX has nothing whatsoever at all in any way to do with executive compensation.

So I am saying that SarbOx was likely an emotional overreaction to a failure in the executive pay "market."

This is gibberish. The law was passed in response to several notable accounting fraud cases.

Dave W.|1.19.06 @ 12:05PM|#

See phil, this is what I meant about tat lesser lights thing. At least try to understand what I am writing here.

|1.19.06 @ 12:21PM|#

So Dave,

Are you really saying that you think if corporate executives were paid less, then SarBox would not have been passed, despite the actions of Enron and Worldcom, et. al.?

That is reading way, way between the lines!

MDH

R C Dean|1.19.06 @ 12:35PM|#

The law was passed in response to several notable accounting fraud cases.

Bingo. No Enron, no SOX.

|1.19.06 @ 1:00PM|#

Dave, try writing something that's relevant to the topic at hand, and I promise I'll give it a whirl. Do you even know or understand what SOX is?

|1.19.06 @ 1:00PM|#

In my opinion, SarbOx is a disaster just about any way you look at it. I'm not sure that Ayn Rand or Kafka could have dreamed up something this ridiculous.

By the way, another crazy aspect of SarbOx not mentioned in the article is the whistleblower provision. Plaintiff-side employment lawyers love this law, because now anytime Mr. Disgruntled Employee gets fired, he can claim that he was fired for complained about Serious Financial Shit and get the Department of Labor involved. And the law is so byzantine that just about any goofy whistleblower claim can get a hearing (and probably a settlement to get rid of Mr. Disgruntled Employee).

Dave W.|1.19.06 @ 1:28PM|#

The law was passed in response to several notable accounting fraud cases.

Bingo. No Enron, no SOX.

Not sure why you guys are arguing with me on this one. I agree with both of our perspective impressions here. here is why:

(1) when executive pay gets large enuf, the temptation to and the access to large scale fraud schemes increases. No high executive pay, no Enron.

(2) Enron + high executive pay = public outrage (more than a white collar crime usually gets).


(3) No public outrage, no SOX. Also, by syllogism, no ENRON, no SOX (although some of the other contemporaneous white collar crimes may have gotten more attention, and inspired something like SOX, even if Enron had stayed clean).

You can disagree with my subjective impression of the psychology underlying SarbOx, but I stand by this read. Precisely speaking, it wasn't ENRON, it was public outrage over ENRON. You may think that executive compensation had nothing to do with the outrage, but it should be obvious why a smart guy like me thinks it was highly relevant. I imagine that we are agreed on the important thing, to wit: SarbOx is bad law.

Dave W.|1.19.06 @ 1:37PM|#

By the way, another crazy aspect of SarbOx not mentioned in the article is the whistleblower provision. Plaintiff-side employment lawyers love this law, because now anytime Mr. Disgruntled Employee gets fired, he can claim that he was fired for complained about Serious Financial Shit and get the Department of Labor involved. And the law is so byzantine that just about any goofy whistleblower claim can get a hearing (and probably a settlement to get rid of Mr. Disgruntled Employee).

Has this actually happened? Linkee?

Corrections Dep't|1.19.06 @ 1:38PM|#

should be --respective impressions--

|1.19.06 @ 1:47PM|#

Dave,

I disagree with portions of your first premise. Executive pay does not equal greater opportunity to commit fraud. Executive status may allow greater opportunity to commit fraud, irrespective of salary. (Relatively low paid executives have the same opportunity to commit fraud as relatively highly paid executives. A 28-year old trader brought down Barings Bank.) I do agree that, to the extent executive compensation is linked to financial results, more pay may equal more temptation to commit fraud.

I also agree that generally public outrage increases with executive compensation. However, IIRC, the outrage over Worldcom and Enron was not that the executives were so highly paid, but rather that the executives lied through their teeth and the mom and pop investors who stupidly bet the farm on these companies lost it all when they went under. (The actual number of mom and pops in this category is probably quite small, but that is the topic for another thread.)

|1.19.06 @ 4:48PM|#

I glad to see a report about the burden and costs of regulations. Although SarbOx documentation requirements have yet to meet the "validation" and documentation requirements of the FDA. The excel spreadsheet example would require many more components in an FDA regulated environment (audit trail, design docs, validation plans, and on and on). It has always seemed odd to me that nobody reports on the regulatory costs of complying with the FDA (one reason I believe there will never be drug price control in the US). Though I doubt you would find any company willing to openly discuss the costs (the FDA can close you down).