Editor’s note: Kevin Gribbon and Glenn Conway are partners in Visage Solutions, LLC.The Sarbanes-Oxley Act of 2002 has become the preeminent topic in the press lately.
Chief Financial Officers are grappling with “disclosure controls.” Corporate Counsel are sifting through the reams of information to provide advice to clients without the benefit of precedence. Chief Executive Officers are signing statements that ensure compliance with a new law in the midst of one of the toughest business environments in recent history. Corporate Boards are struggling to revise their composition and the charter and focus of their audit committees.
Layered on top of this is often conflicting advice from a myriad of different sources: academics, business process engineering firms, legal professionals and auditing firms. This fundamental restructuring of corporate governance is occurring under increased public scrutiny brought about by a number of scandals in boardrooms, investment houses and public auditing firms.
The cynic may regard this legislation as an attempt to “legislate morality” or that corporate management should have been following the guidelines as “common sense management” anyway. Regardless, it is now law and corporate managers are faced with the challenge of implementing controls, revising corporate governance rules and keeping their business profitable or face potential legal consequences.
Problems with boards
One of the interesting implications of the legislation is the focus on requiring additional “independent directors.” In the past these people were often referred to as “outside directors;” meaning that they were not directly employed by the company. It was acceptable to sit on the audit committee and work for the auditing firm, leading to conflict of interest concerns. The current rules impose additional requirements on the composition of the board, leading to an increased demand for additional independent directors. Couple this with the increased demands on board members and a greater liability and workload inherent in these regulations and the result is fewer people willing to serve on board seats.
This increased liability for board members, executive management and audit committee members will be reflected in even greater premiums for Directors and Officers (D&O) insurance coverage. Not suprisingly, some outside board members seek additional insurance coverage above and beyond that provided by the company before they will agree to serve. Insurance companies have been driven to investigate new methods to determine risk levels for their corporate clients and of course, premiums will continue to increase substantially. Although premiums have risen 200% to 400% over the past few years, the underwriters of D&O insurance struggle with the costs associated with the huge claims they are facing.
Intention of the law
With all the current confusion, conflict and uncertainty, a company may end up worse off than prior to the legislation. A company that follows each “new” bit of advice is at risk of expending tremendous effort in the wrong places. A better approach is to look beyond the short term compliance requirements and understand the intention of the law.
In order to understand the true intention of the Sarbanes-Oxley act and all of its ramifications, it is important to understand what drove its passage. In the future, we will explore the goal of the act and some of the implications on those immediately affected.
The writers of the Sarbanes-Oxley Act indicate that the act is meant to protect investors. More importantly, the acts ultimate goal is to build trust and confidence in the investor community that they have the correct information that will allow them to once again enter the stock market and help companies invest in the future. This is a fundamental building block, which will allow the economy to begin to expand.
Mere compliance with the statutory provisions of the Act doesn’t satisfy the intent of the Act. To be effective, more than superficial compliance efforts are required. Corporations must look beyond the individual provisions of the Act to see what might be triggered downstream and allow investors the confidence needed to invest in the corporation.
The Sarbanes-Oxley Act is subtitled “An Act – To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.”
If this statement is interpreted literally, the objective of the Act is not to create criminal penalties, nor to over-regulate corporations, nor to implement new accounting guidelines per se.
The objective of the Act is simply “To protect investors.” But –
“protecting investors” requires consideration of many matters not limited to accounting and disclosure processes. The mix of obligations, penalties and consequences detailed in the Sarbanes-Oxley Act was Congress’s immediate “process” to start “fixing” a number of significant problems. The Act was intended to cause a number of long term operational and philosophical changes that Congress could not overtly legislate. The Sarbanes Act is merely a stepping stone toward achieving significant changes in the corporate governance process.
Congress can not legislate high quality leadership any more than it can legislate solid ethics and values or excellent people management skills. That is, Congress can’t legislate the causes or drivers of corporate performance or malfeasance. Congress can only legislate the consequences for specific acts and behaviors. By making it illegal or more difficult to do certain things (such as falsifying revenue figures or selling stock when others can’t), Congress expects to effect operational and morality shifts in corporations. Sarbanes-Oxley is a launching pad for changes, not the final solution unto itself.
Visage Solutions are results-focused operation assessment and risk management consultants who offer extensive real-world executive management experience. Visage Solutions offers a suite of services that provide a strategic approach to operations to improve business processes that affect the bottom line. Sarbanes-Oxley related services include OpsAudit• and Compliance Process Improvement Services supporting Sections 302, 404, 406, 409, 802 and 806.