Corporate Governance

Corporate Governance, the Bailout and a Lost Opportunity (Part 2)

By J. Robert Brown

As we noted, the Bailout Bill failed to address the corporate governance weaknesses that allowed the financial crisis to occur.  Compare this legislation to the response to the last substantial financial crisis, Enron and Worldcom. 

The legislative response to those failures and the threat to the integrity of the securities markets was substantial reforms to the corporate governance proces.  Congress, in adopting Sarbanes-Oxley (SOX) imposed accountability on CEOs and CFOs by requiring them to certify the financial statements, increased board oversight by mandating audit committees with financial expertise and independent directors, and required internal controls.  The internal controls had to be examined by outside auditors.  The core purpose of the Act was to increase oversight of the CEO to prevent fraud and improve the integrity of the financial reporting process.  

But the reforms were limited.  They did not require any greater involvement of the board as a whole.  They focused on the integrity of the financial disclosure process.  In other words, they were designed to make certain that the numbers were accurate but did nothing to affect the actual business of the applicable corporations.  As a result, the board's duties to oversee management, with the exception of the financial disclosure process, were largely ignored, left entirely to state (read Delaware) law to determine.  

The Bailout Bill left the board's responsibility untouched.  The only corporate governance provisions related to executive compensation, provisions that preempted Delaware law by having the federal government for the first time set some of the standards for officer pay.  But while they put substantive limits on compensation, they left in place the systemic failures that resulted in the crisis in the first instance. 

We will write one more post and provide some suggestions for what Congress could have done to fix the systemic problems that allowed much of this crisis to develop. 

Full post as published by The Race to the Bottom on October 06, 2008 (boomark / email).