The Sarbanes-Oxley Act 2002 may have had the effect of persuading some companies to delist and others to seek funding on private markets rather than public ones, but that is a price worth paying for well-functioning stock markets. Discuss.

The Sarbanes-Oxley Act in the US
Perhaps the most dramatic development in relation to corporate governance in the past two decades has been the Sarbanes-Oxley Act of 2002 in the US. When signing it into law, President Bush described the Act as “the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt” – a reference to the Securities Acts of 1933 and 1934.
Passed in response to the spate of corporate scandals at the turn of the century, this Act stands in stark contrast to the previously prevalent approach of leaving as much as possible of corporate governance to the private sector and self-regulation. Understood as incontrovertible evidence of the abject failure of that non-interventionist approach, Enron, WorldCom and the rest persuaded legislators that tough and decisive action was required. Undoubtedly tough, Sarbanes-Oxley has, however, been subject to criticism that it has both gone too far and not achieved the desired effect.

Questions in class to be considered for this essay
1. What are the main features of the Sarbanes-Oxley Act?
2. How does Ribstein characterise the ‘case for market failure’ made in the wake of the Enron and WorldCom scandals?
3. Summarise the problems Ribstein identifies with the regulatory response to this failure embodied in the Sarbanes-Oxley Act.
4. In what ways does he believe that the market is better able to respond to the problems revealed by the scandals of recent years?
5. Romano is particularly concerned by the shortcomings of the political process in producing a piece of legislation that she regards as flawed. What is the essence of her argument? Are you persuaded by it? If yes, what does this suggest about the appropriate forum for decisions about corporate governance rules? If no, how would you rebut Romano’s critique?
6. What are the main problems caused by the Act as identified by the Committee on Capital Markets? What do you make of their proposals in relation to the London approach given what we read in the paper by MacNeil and Li in the last seminar?

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