Dubnick, Melvin J., “Sarbanes-Oxley and the Search For Accountable Corporate Governance.” Prepared for presentation at the ESRC/GOVNET Workshop on The Dynamics of Capital Market Governance: Evaluating the Conflicting and Conflating Roles of Compliance, Regulation, Ethics and Accountability, Australian National University, Canberra, AU, 14-15 March 2007.
Abstract:
While designed as a politically expedient response to a moral panic fed by media frenzy (Gabilondo, 2006), SOx has brought to the fore fundamental issues about the nature of the modern corporate form that have lain fallow for nearly a century among Anglo American scholars. The debate about the nature of the corporation was preemptively dismissed as mere scholastic banter by no less an authority than John Dewey in 1926 and has only intermittently been revisited. The argument presented here attempts to reopen those discussions with the intent of reasserting a perspective on the purpose of corporations that allows us to assess corporate governance reforms such as Sarbanes-Oxley. The perspective I put forward is anchored in contention that modern governance – public as well as private — is at its core based on some form of accountability. Accountability-based governance, in this view, emerged historically as an effective response to the central dilemma facing secular rulers of the embryonic nation-state in the late medieval period – that is, how to maintain and sustain authority over autonomous subjects who were becoming increasingly aware of their capacity for discretionary action. The modern corporate form, I will argue, developed as part of that solution in Anglo-Norman England, and it is in light of those historical roots that contemporary corporate governance and corporate governance reforms efforts should be assessed.
AI-Generated Summary:
This document analyzes the purpose and effectiveness of corporate governance reforms, particularly the Sarbanes-Oxley Act, through a historical and accountability-based perspective.
Historical Roots of Corporate Purpose
- The modern corporation evolved from ecclesiastic, Italian, and English origins, blending passive legal fiction, active contractual associations, and autonomous entities.
- Its purpose historically centered on public benefit, profit, or collective service, with accountability to sovereign authority emerging as a core principle.
Anglo-Norman Foundations of Corporate Accountability
- Accountability in governance originated from medieval England, notably through oaths of fealty and charters granted by the crown.
- These charters created accountable institutions responsible to the sovereign, establishing a reciprocal relationship between rulers and autonomous agents.
Development of Corporate Legal Forms
- The corporation’s hybrid nature combines ecclesiastic passive entities, active Italian joint-stock models, and English autonomous associations.
- Key milestones include the 1719 Bubble Act and the 1844 Companies Act, which formalized incorporation and limited liability, fostering business growth.
Purpose as Accountability in Corporate Law
- The core purpose of corporate governance is to maintain the corporation’s fitness for accountability.
- This perspective emphasizes responsibility and obligation to the sovereign or principal, framing corporate purpose as accountable institution management.
Comparing Governance Models
- The stakeholder model views corporations as accountable to a broad set of interests beyond shareholders.
- The fiduciary model emphasizes duty-bound management focused on shareholder interests, contrasting with the accountability standard rooted in historical sovereignty.
Impact of Sarbanes-Oxley
- The 2002 law aimed to improve corporate transparency and accountability, with assessments focusing on its intentions, functions, and impacts.
- Less examined is how SOx aligns with the historical purpose of corporate governance centered on accountability to responsible authority.
Assessing Corporate Governance Reforms
- Effective evaluation involves understanding the law’s purpose, impacts, and unintended consequences.
- The historical purpose of accountability provides a standard to critically measure reforms like SOx against the foundational role of responsible governance.
Main Perspectives on Corporate Governance
- The dominant US model views governance as mechanisms to protect investor returns, focusing on aligning management with owners.
- Critics often adopt a myopic stakeholder approach, emphasizing broad stakeholder interests or socially responsible actions, but often neglect the foundational purpose of accountability.
Historical Foundations and Evolution
- Berle and Means’ 1932 work highlighted the ownership-management gap, shaping the focus on aligning management with owner interests.
- Reforms have aimed to broaden stakeholder roles or promote social responsibility, but often lack a focus on the core accountability purpose.
Fiduciary and Legal Corporate Governance
- The fiduciary model centers on legal responsibilities to the corporate entity, requiring decision-makers to act in its best interest regardless of personal or shareholder interests.
- An example is the 2002 Hershey sale episode, illustrating fiduciary duties overriding stakeholder or shareholder pressures.
Accountability Model and Corporate Purpose
- The accountability approach emphasizes the corporation as a rights-and-duty-bearing entity with a legal franchise granted by the state.
- Reforms should be evaluated based on how well they enhance the corporation’s accountability to its purpose, but most current efforts focus on shareholder or stakeholder rights.
Four Orders of Accountability
- First order (“performative”) involves explicit acts of account giving, such as reports or testimony, responding directly to solicitations.
- Second order (“regulatory”) relies on following rules and standards, with law and architecture constraining behavior.
Higher Orders of Accountability
- Third order (“managerial”) uses accountability to motivate better performance through incentives and sanctions.
- Fourth order (“embedded”) internalizes moral responsibility, shaping corporate culture and norms over time.
Sarbanes-Oxley Act (SOx) and Its Limitations
- SOx primarily implements first and second order accountability measures, such as reporting, internal controls, and criminal sanctions.
- It lacks provisions for third and fourth order accountability, meaning it does not foster deep moral or embedded responsibility.
Evaluation of SOx Reforms
- Many SOx provisions focus on compliance and oversight rather than establishing a moral obligation or cultural accountability.
- The law’s emphasis on regulation and reporting limits its capacity to create a truly accountable corporate purpose.
Conclusion on Corporate Reform
- SOx is a significant regulatory milestone but misses the opportunity to embed accountability as a core corporate value.
- Achieving embedded accountability would require fundamental changes in legal ontology and corporate culture, which current reforms do not address.