Dubnick, Melvin J., “Sarbanes-Oxley And The Search For Accountable Corporate Governance,” GovNet eJournal 1 (2), 2007:140-172.
Dubnick, Melvin J., “Sarbanes-Oxley And The Search For Accountable Corporate Governance.” In Justin O’Brien (ed) Private Equity, Corporate Governance and the Dynamics of Capital Market Regulation (London: Imperial College Press, 2007): 226-254.
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This document analyzes the purpose and impact of corporate governance reforms, particularly the Sarbanes-Oxley Act, within the historical and theoretical context of corporate accountability.
Historical Roots of Corporate Purpose
- The modern corporation evolved from ecclesiastic, Italian, and English origins, blending legal fiction, contractual association, and autonomous entity concepts.
- Its purpose historically centered on providing public benefits, such as education or charity, with legal recognition through royal charters and acts.
Development of Corporate Legal Identity
- The corporation is an artificial being with legal standing, capable of managing property and acting as a single entity.
- Chief Justice Marshall defined it as an immortal, perpetual successor of individuals created for beneficial objects, not political power.
Origins of Corporate Governance
- Early corporate forms emerged from medieval collectivities like towns, guilds, and monasteries, which developed into legal entities for economic and social functions.
- Formal recognition through charters and the accountability structures established in 1086 at Salisbury marked key moments in governance evolution.
Hybrid Nature of Modern Corporations
- The modern corporation combines ecclesiastic, Italian, and English roots, functioning as a legal fiction with real-world interests.
- Its development was most advanced in England, with the Dartmouth College case emphasizing its purpose as a perpetual, beneficial entity created by law.
Impact of Historical Legislation
- Acts like the Bubble Act of 1720 and the Companies Act of 1844 facilitated incorporation, especially for business ventures, by offering limited liability and legal protections.
- These laws transformed the corporation into a primary vehicle for economic activity, rooted in its historical purpose of public benefit and legal recognition.
Purpose and Assessment of Corporate Governance Reforms
- Corporate governance reforms, like Sarbanes-Oxley, should be evaluated against the historical purpose of accountability embedded in the corporate form.
- The law’s intent, function, impact, and long-term purpose are crucial for understanding its role in promoting responsible corporate behavior.
The Role of Accountability in Governance
- Accountability has historically been central to governance, originating from medieval efforts to maintain authority over autonomous subjects.
- Modern corporate governance reflects this legacy, emphasizing mechanisms that ensure corporate accountability to stakeholders.
Historical Development of Corporate Accountability
- The origins of accountable governance trace back to medieval England, where oaths and charters established reciprocal responsibilities between rulers and subjects.
- Charters granted to enterprises acknowledged their responsibilities to the crown, forming the foundation for modern notions of accountable institutions.
Evolution of Corporate Governance Models
- The stakeholder model focuses on how firms serve the interests of financiers and other capital providers.
- The fiduciary model emphasizes duties to the corporate entity itself, requiring managers to act in its best long-term interest, often overriding shareholder concerns.
The Accountability Model in Corporate Governance
- The English tradition views corporations as rights-and-duty-bearing entities with active legal standing, emphasizing accountability to higher principals like the state or public interest.
- This model underpins the purpose of corporate governance as maintaining the corporation’s fitness for responsibility and accountability.
Types of Accountability Relationships
- First order (performative) accountability involves explicit acts of giving an account, such as reporting or audits.
- Second order (regulatory) accountability relies on rules and standards to constrain behavior, often through law or architecture.
- Third order (managerial) accountability aims to motivate responsible behavior via incentives and performance assessments.
- Fourth order (embedded) accountability involves internalized norms and values, shaping corporate culture and moral responsibility.
Impact of Sarbanes-Oxley on Corporate Accountability
- The Act primarily contains first, second, and some third order provisions, focusing on disclosures, audits, and criminal penalties.
- It lacks explicit fourth order (embedded) accountability measures, which are crucial for fostering a responsible corporate culture.
Limitations of Sarbanes-Oxley
- The legislation emphasizes compliance and retribution over cultivating moral obligations and internalized responsibility.
- Most provisions target regulatory and managerial accountability, with minimal focus on embedding accountability as a core value.
The Need for Fourth Order Reforms
- True accountable governance requires cultural and legal shifts toward internalized norms and moral responsibility.
- Current reforms, including Sarbanes-Oxley, fall short of establishing a responsible corporate purpose aligned with the historical accountability ideal.