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W. Randy Eaddy and Neil D. Falis are partners in the corporate group at Atlanta’s Kilpatrick Stockton. July 30 marked the first anniversary of the Sarbanes-Oxley Act, which ignited other corporate governance reform initiatives, some predictable, others less so. Have the reforms yielded benefits that will restore investor confidence and eliminate corporate fraud? Or have they been much ado about very little, except perhaps as a boon to lawyers and other professionals? There is no simple answer, and perhaps it is still too soon to speak conclusively. Right now, it is a mixed bag of results. The increased focus on corporate governance issues undoubtedly aided in uncovering scandals beyond the catalytic Enron/Arthur Andersen and WorldCom situations, such as those at Tyco, Xerox and HealthSouth. Ten of the largest Wall Street investment banks signed a settlement with regulators concerning their repeated misuse of stock analyses and other problematic practices in offering securities. Executives of several public companies have been indicted for fraud and other breaches of duties to shareholders. Sarbanes-Oxley initiated numerous procedural and structural reforms-many of which will be achieved by rules being promulgated by the major U.S. stock exchanges and markets-that significantly strengthened requirements for independence and meaningful diligence by corporate boards. The Financial Standards Accounting Board was prompted finally to propose major rule changes concerning the expensing of stock options, which should have a significant effect on how they are used in the future. All of these measures should yield long-term benefits for public shareholders. But these benefits came with a price tag. A survey of midsized public companies indicated the average annual cost of being a public company has almost doubled, from $1.3 million to almost $2.5 million. The increase reflects items such as higher premiums for directors’ and officers’ insurance, and higher legal and accounting costs to comply with the new disclosure rules. As a result, many small companies may not be able to continue as public entities (although some observers view that as a positive result). The reforms did not impose many new substantive rules for behavior by corporate actors. And there are many objectionable practices they do not directly restrain, such as the high level of executive compensation at many public companies and the frequent failure to tie such compensation to long-term stock prices (or other value enhancement) for investors. Sarbanes-Oxley’s prohibition of personal loans to executives is its only true substantive rule. Still, the reforms are causing many directors to alter attitudes and practices. While the underlying substantive standards remain the same, the reforms have focused unparalleled scrutiny on how directors discharge their fiduciary duties for the benefit of shareholders. Directors now face heightened risks of liability if they fail to supervise management with the scrutiny that was always required by corporate law. In turn, most executives now feel more restraint in what they attempt or recommend to their boards. No, it’s not enough Fortunately, all indications are that additional reforms are forthcoming, and they are likely to focus more on substantive standards rather than procedure and structure. Substantive corporate governance is largely the domain of state law; the battle will shift from Washington to state legislatures and bar associations. The recent report of the American Bar Association’s Task Force on Corporate Responsibility included several recommendations for amendments to state corporate codes. Outgoing ABA president Alfred P. Carlton Jr. has expressed the importance of state-level reform to “infuse corporate actors with a new sense of integrity and personal accountability to all stakeholders.” Continued and increased pressure from organizations such as Institutional Shareholder Services and GovernanceMetrics International, which provide research and shareholder proposal recommendations to their institutional clients, are likely to influence this next wave of reforms. These organizations rate corporate-governance practices of public companies on matters such as executive compensation, the separation of the chair- man and CEO positions, and the practical access of shareholders to the proxy process for nominating and electing directors. Beyond pressuring public companies to voluntarily implement mainstream governance practices, they are likely to influence lawmakers as well. We have come a long way since the initial disclosure of scandals at Enron and WorldCom. Many avenues leading to such scandals have been closed. But history has shown that those who are determined to commit fraud are likely to do so regardless of what rules are established. History also reveals that periods of reform in reaction to corporate scandals, such as those in the early 1990s, are often followed by complacency. All who have a stake in the future of our capital markets system should remain focused and active in our scrutiny of corporate behavior. Such vigilance, in the end, is the single best prescription for motivating corporate actors to serve in the best interests of their company and its owners, which, ultimately, will serve to promote the integrity and investor confidence in corporate America we desire.

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