Brilliant and influential Delaware Vice Chancellor Leo Strine bashed Sarbanes-Oxley in a London speech. Specifically, he reportedly:
... warned federal legislators to "stay in [their] lane" and leave corporation law to individual states. ...
Judge Strine said in a speech to the European Policy Forum, a think-tank, that following the Enron and WorldCom scandals "the sour scent of hypocrisy wafted from some important congressional chambers" as federal legislators who had previously helped to block efforts began to support rapid action. He described the Sarbanes-Oxley legislation as a "strange stew" that coupled sensible ideas with "narrow provisions of dubious value".
Well put. In my article, The Creeping Federalization of Corporate Governance, I likewise warned that the federal regulators were going too far in intruding into an area traditionally - and properly - left to state regulation:
Taken individually, each of Sarbanes-Oxley's provisions constitutes a significant preemption of state corporate law. Taken together, they constitute the most dramatic expansion of federal regulatory power over corporate governance since the New Deal.
... I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost.
Strine also reportedly warned:
"The emerging model is a board comprised of one insider - the CEO - who knows everything about the corporation and who has a keen interest in its future, and 10 independent directors selected precisely because they have no affiliation with or, interest in, the business or its fate," he said.
"That is an odd group to help develop a business strategy and seems likely to function largely as a monitor, with strategy being left to the CEO and subordinates outside the board's presence."
I agree with Strine that SOX and concommitant stock exchange listing standards have gone overboard with mandating independence for boards of directors. As I explained in my article, A Critique of the NYSE's Director Independence Listing Standards:
... are not supported by the evidence on director performance and, moreover, adopt an undesirable one size fits all approach. Firms have unique needs and should be free -- as state law now allows -- to develop unique accountability mechanisms carefully tailored for the firm's special needs.
I also agree with Strine that the so-called "monitoring model" of the board of directors, a concept popularized by Boalt Hall law professor Melvin Eisenberg, among others, which has been effectively incorporated into SOX and the stock exchange listing standards, is too narrow an understanding of the role of the board. As I explain in my article, boards actually serve a number of functions:
First, while boards rarely are involved in day-to-day operational decisionmaking, most boards have at least some managerial functions. Broad policymaking is commonly a board prerogative, for example. Even more commonly, however, individual board members provide advice and guidance to top managers with respect to operational and/or policy decisions. In addition, the board provides access to a network of contacts that may be useful in gathering resources and/or obtaining business. Secondly, the board monitors and disciplines top management.
The analysis set out in my article strongly suggests that boards comprised almost entirely of independent directors often struggle to fulfill the first set of tasks and, perhaps somewhat surprisingly, even have problems with the monitoring function.
