It seems fitting that last week as our local Rockies took a drubbing from the mighty Red Sox juggernaut, my mind has been preoccupied with Sarbanes Oxley.
My wife is a third-year law student at the University of Denver. Amazing woman. At 38, she’s raised two kids (not including me) and learned a few things about life; so, she knows professorial bologna when she sees it in class. She came home last week with some particularly entertaining tidbits.
Seems her Corporate Governance professor spent a class session raving about the benefits of Sarbanes Oxley, particularly how it has effectively constrained the ability of always-grubbing CEOs and hypnotized Boards to exploit and mislead shareholders.
I have two problems with this prof’s perspective. The prof’s first assertion is that these guys and gals are, as a general rule, trying to pull the wool over shareholders’ eyes. I’ve worked with/for many CEOs and CFOs of public companies, and my experience suggests that these guys and gals are no more and no less honorable, trustworthy, selfish, etc. than the average worker or shareholder. Sure, they are more, shall we say, confident than the average person. But, confidence is not a crime, and SOX cannot do anything about it -- even if it were in shareholders’ best interest to humble their CEOs (which I doubt). In marriage, you can’t love someone you don’t trust. Shareholder-CEO relationships are very similar: trust them or replace them, but don’t get caught in the middle relying on a piece of paper.
The prof’s second implicit assertion is that SOX is an effective restraint on the small percentage of CEOs who would otherwise abuse the system. My wife, who’s never been in a board meeting, but who is a great student of human nature and behavior, smells a rat here, and I agree with her. Remember, back in the 30’s everyone called for the SEC and accounting standards in the wake of the crash -- as safeguards sure to protect the hapless investor from the greedy charlatan. But, we still had the S&L crisis and the limited partnership train wreck and the Internet hype-boom-bust and the Enron/MCI debacles. The bottom line is this: the people running ventures are smarter than the people who write regulations -- and far faster at adapting. So, some bad apples are going to get through, no matter how bullet-proof you try to make your regs. Do you really believe that Jeff Skilling isn’t smart enough to have outwitted the SOX guideline-wielding accountants? Seriously now.
So, at some point regulations hit diminishing marginal returns for society. At some point they even become counterproductive. SOX is a bit like a warm blanket. Makes you feel better, but doesn’t actually make the snow go away. And, the downside is that the cost incurred by the vast majority of systematically-honest organizations is a negative-ROI deal: shareholders are no better informed, and the company is hurt by the costs and strictures.