Peter Wallison, in today’s Wall Street Journal (registration required, and yes you have to pay), serves up a biting critique of Sarbanes-Oxley, the recent legislation aimed at limiting conflicts of interest within corporations.
Here is a key passage:
…this was a wholesale change in the governance of American corporations, putting significantly more authority into the hands of independent directors and correspondingly reducing the power of corporate managements…it may have had unintended consequences – a reluctance of managements to take the risks and make the investments that had previously brought the economy roaring back from periods of stagnation or recession…The independent directors of a company are part-timers…Unfamiliarity in turn breeds caution and conservatism…They [directors] have little incentive to take risk and multiple reasons to avoid it.
There is not much more to the Op-Ed than that, no real facts, but this is an important point. Passing Sarbanes-Oxley was a kneejerk reaction from a Congress that felt the need to do something, anything, about corporate scandals. The Senate voted for it 99-0 (only a few negative votes in the House), never a good sign, unanimous votes often mean that an angry and uninformed public opinion rules the day. Time will tell what costs we will pay for this mistake.
Here is a small bit on implementation costs, but keep in mind they are secondary to the question of how investment gets distorted. I realize that corporate insiders are not the ones to trust here, but they don’t like the law either.
Let’s accept the fact that corporate governance isn’t always fair, and opt for the system that does the best job of delivering the goods.
Addendum: Here is a direct link.