Waiting around for the other shoe to drop in the wake of the passage of the Sarbanes-Oxley Act a little over two years ago is a lot like looking for the next surprise right around the corner. With the wind of public sentiment at its back, this landmark legislation has spawned a seemingly never ending push to up the ante with collateral statutes, rules, regulations, guidelines and "best practices." It's little wonder, then, that the Act is considered the most significant change in the corporate governance landscape since the passage of the Securities Exchange Act seventy years ago. Change, therefore, keeps coming in a continuous stream at a rate unimaginable just a few years ago as the century drew to a close.
This shift probably was occasioned, more than any other single factor, by the simple fact that more Americans than at any time in our history are now shareholders - through retirement plans, mutual funds or otherwise - with a personal economic stake in the honesty and integrity of companies and the financial markets. Whatever else this has meant, it surely has signaled to legislators, prosecutors and regulators that the more aggressive they can be in response to scandal, the better. Corporate scandal has led to fundamental reform, and its consequences are felt across the economy, with voters and elected officials, in courts, by judges and juries and in the boardroom.
So, for example, many states in the aftermath of Sarbanes-Oxley have moved to criminalize under state law that which was formerly governed by civil breach of fiduciary duty standards, created new criminal proscriptions, aligned their corporate laws with Sarbanes-Oxley type penalties and remedies, weakened mens rea requirements applicable in the business conduct context and enacted harsher penalties for white collar crime overall. In short, as noted in a recent study by the Stateside Associates of Arlington, Virginia, twenty-eight states since January 2000 have made sweeping changes to their criminal codes governing business conduct.1
A review of every aspect of executive compensation is not just going on at the New York Stock Exchange (NYSE) in response to the uproar occasioned by former Exchange Chairman Richard A. Grasso's $187 million pay package. While there are those who will debate for some time the reach of New York's Not-For-Profit Corporation Law, the second-guessing of outrageous compensation will not be limited to New York Attorney General Eliot Spitzer and what is "reasonable" in the not-for-profit context. Now that the NYSE has required all listed companies to have their boards establish a compensation committee, it's reasonable to assume, at the very least, that breach of fiduciary duty civil claims will follow compensation decisions determined to be excessive and/or not fully informed. Compensation committees are certainly well advised to consult compensation experts and outside consultants given the public spotlight on the Grasso payout. Full disclosure is the new watchword for executive compensation.
Coming in October 2004, mutual fund compliance chiefs, aimed at protecting shareholders, will be required by the Securities and Exchange Commission (SEC). By October 5, 2004, the new compliance position - an officer who must be vested with authority to report directly to the fund's board - must be created. The cost of compliance likely will be borne by investors through increased administrative fees.2
Speaking of increased administrative costs, the Chicago law firm Foley & Lardner reports that since 2002, Sarbanes-Oxley compliance for a publicly traded company with revenue of $1 billion or more in revenues costs on average $7.4 million, and for companies with less than $1 billion in revenues, the compliance costs have soared 130% since 2001!
And the drumbeat to enhance corporate compliance programs continues. Effective November 1, 2004, the federal Sentencing Guidelines for corporations will require, in evaluating the effectiveness of internal corporate compliance, a raft of new standards. Among them are board and management oversight of the program, ongoing risk assessment, monitoring and auditing systems, general counsel (or equivalent) responsibility for implementation and effectiveness of the program and training on compliance procedures at all levels of the organization, including board members. What this means is that corporations from top to bottom must be knowledgeable about the content and operation of the compliance program under penalty that a prosecutor could charge, and a court could punish, a company deemed to have fallen short in its response to wayward employees found to have committed criminal acts.
In short, the corporate compliance menu for companies has gotten that much fatter with no apparent end in sight as the bar continues to be raised more than two years following Congress' enactment of the Sarbanes-Oxley Act.
1 See "Recent Developments in State Corporate Criminalization," State Court Docket Watch, The Federalist Society for Law and Public Policy Studies, Aug. 2004 (Executive Summary found at www.fed-soc.org).
2 See " New Mutual-Fund Cops Will Come at a Cost," Wall Street Journal, C1 (Aug. 20, 2004).