8 Ways Impacts on Corporate Governance

f1: It reformed and re-empowered the corporate board of directors.

The most prominent change SOX engendered was a shift from a perspective that the board serves management to a perspective that management is working for the board. “That’s what our corporate structure in the U.S. intended, but you were seeing it exercised less in the day-to-day and more in the formalities of documentation,” says Ralph DeMartino, chair of the global securities group at Cozen O’Connor. “That’s been a radical shift.”

SOX also recognized that director independence is necessary for the board to serve effectively as a check on management. It allows for director liability if the board fails to exercise the appropriate oversight.

Steve Blonder, a principal at Much Shelist, says that in the wake of SOX, companies are stronger and subject to additional oversight from more proactive board members with greater technical expertise. In general, he says, the increased demands and need for independence has led to greater diversity among the people who serve on boards.

Today, the audit committee of the board has greater powers and many more responsibilities, such as working with external auditors of internal controls. “They’re kind of king of the hill of any board committee,” says William Currier, a partner at White & Case and a former (SEC) assistant director who was at the agency during the SOX rulemaking and implementation. “Now under certain circumstances, if management or [the audit committee of the board] doesn’t respond to reports [of misconduct] from independent auditors, the independent auditors have the obligation to inform the SEC that there has been a dispute and to resign. That’s a huge amount of leverage and responsibility directly derived from SOX.”

In general, boards are more focused on their responsibilities, says Linda Chatman Thomsen, who was director of the SEC’s Division of Enforcement from 2005 to 2009 and led the Enron investigation. Thomsen now is a partner at Davis Polk & Wardwell.

“It may be luck or effective enforcement and laws, but since, I haven’t seen an Enron or a WorldCom blowup to the magnitude that we saw those kinds of public company issues [before SOX],” she says.

#2: It encouraged the adoption of corporate codes of ethics.

SOX required companies to disclose whether their senior executives and financial officers followed a code of ethics. If they didn’t have one, they had to explain why. Around the same time, both the New York Stock Exchange and Nasdaq adopted rules requiring that listed companies adopt and disclose a code of conduct. While the SOX rule didn’t require adoption of a code, it made clear that the SEC expected one.

“Over the past 20 years, the government has been encouraging employers to adopt ethics and compliance programs in a number of ways,” says Chip Jones, a Littler Mendelson shareholder who counsels clients on such programs.

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