Chapter 8

The Argument for Accountability

Introduction

It has been duly noted by at least one comic book superhero that “with great power comes great responsibility.”¹ Generally speaking, American jurisprudence tends to reflect this fact, with a conspicuous exception for policymakers—individuals who, though virtually untouchable under the law, wield enormous influence over nearly every facet of modern-day America.

One example is Sarbanes-Oxley, for which an organized and strategic campaign was required to produce its legislative enactment. Despite the enormous chasm between the lofty ambitions and the widely documented outcomes²—for example, extensive, potentially irreversible, damages to the U.S. economy, affecting the individual welfare of untold millions of Americans and many more throughout the world—no one, to date, has been asked to shoulder even a hint of responsibility.

The contrast between the complete absence of any accountability whatsoever for policymakers and the treatment afforded corporate executives under current U.S. law is not only apparent but questionable. To explore the rational justification³ for this apparent disparity in treatment, consider the following. Under current law, malfeasant behaviors as committed by policymakers are not punishable. In contrast, Sarbanes-Oxley made it possible, for the first time in U.S. history, for corporate executives to be held criminally liable for outcomes they never intended.⁴

This constitutes a real and serious threat for the leader of a public corporation, which—at some level and in some capacity—is bound to inadvertently cause an injury, whether perceived or real, to some constituency. The expected result is a civil lawsuit, one that, due to Sarbanes-Oxley, now has the potential to spur a criminal investigation, and thus lead to potential charges against the CEO, all stemming from a specific outcome that the CEO never intended, and of which he or she likely had no prior knowledge.⁵

The apparent, rational justification⁶ for this onerous increase in CEO liability is the various harms caused shareholders by pronounced instances of corporate malfeasance from 2000 to 2002. Whereas these events fail to justify the noted lack of accountability for policymakers, a reference to them is likely to be made in support of an argument that a dramatic increase in punitive measures, attributed to the corporate executive, will benefit shareholders. However, such an argument is relatively weak.

Due to the relatively low probability that any single firm will actually fail due to corporate malfeasance, the responsible investor—for example, one who engages in portfolio diversification—is unlikely to suffer undue economic consequences. However, the same argument does not apply to significant harms caused by the costly failure of Sarbanes-Oxley. This egregious policymaking failure has negatively affected all Americans⁷—and continues to do so to the present day—even those who are not invested in the equity market, not to mention a wide range of citizens of foreign nations as well.

Furthermore, the individual is effectively unable to adopt any remedial measures that might make it possible to avoid the injurious effects caused by policymakers. Thus it is apparent that the level of responsibility—measured, for instance, as a capacity to injure public welfare—shared by corporate CEOs, relative to policymakers, is quite small. This brief analysis suggests that the enormous disparity between corporate CEOs and leading policymakers, in terms of legal liability, lacks a rational basis and thus is unwarranted.

Professional Liability

Under U.S. law, physicians and a wide range of professional occupations share specific legal liability constraints, where the general aim is to protect the consumer from harm. However, U.S. policymakers, despite the profound ability they possess to influence the lives of others, are not subject to such accountability. Nor is there any valid, a priori reason to exempt policymakers from personal responsibility for egregious failures resulting in extensive harm to others: Policymakers, like professionals in other trades, are no less susceptible to grave error.

The major difference, as it applies to policymakers, appears to be that the potential harms induced by a material error(s) detract not only from the welfare of a single consumer, but from that of an entire nation. This is important since American jurisprudence, in general, is based on the principle of deterrence, suggesting that the meting out of punishment in the legal system should reflect the amount of harm committed. Thus a rational expectation would be for the liability constraints of policymakers to vastly exceed that of corporate CEOs.

To be clear, this is not to imply that the mere perception of policy failure should invite a criminal investigation. To the contrary, the demands of logic would require that policymakers—like other professionals, especially physicians⁸—not be held legally accountable for unwanted, unforeseeable outcomes. From this perspective, the onerous and costly failure of Sarbanes-Oxley, in and of itself, would constitute an insufficient pretext for seeking legal charges against those chiefly responsible. Exceptions should also be made for permissible deviations—for example, differences of opinion, where the established orthopraxy admits more than one acceptable alternative—from established protocols, arguably even in the presence of significant and negative unintended consequences.

Just as patients afforded every medically indicated treatment may fail to recover, policies sound in substance may nevertheless fail to achieve the desired results, owing to the probabilistic nature of complex phenomena. Furthermore, permissible allowances must be made for a reasonable degree of human error. Otherwise, the slightest mistake may be subject to legal incrimination, transforming an already difficult task—i.e., policymaking—into one that is unreasonably burdensome.

As a practical illustration consider the near futility of contemporary efforts to provide obstetric care in specific U.S. rural regions. Rural shortages of obstetricians today are widespread, due in part to an adverse legal environment. Because successful lawsuits requiring sizeable damages have been brought against rural obstetricians on the sole basis of unwanted outcome(s), versus physician negligence, legal liability concerns have soared. Thus, in certain geographic areas, insurance companies have either refused to provide coverage to obstetricians, or they raised malpractice insurance premiums to the extent that physicians can no longer afford to practice.⁹

This is to suggest that any comprehensive effort to introduce accountability must be accompanied by a reasonable allowance for factors such as human error and unwanted outcomes not caused by professional negligence. Arguably, this may exempt from potential legal culpability the majority of those in the 107th Congress who supported Sarbanes-Oxley. Legal liability, in theory, is closely correlated with individual capacity: Physicians, for instance, are typically held to higher standards than are nurses. However, individuals who are elected to Congress, in general, are not required to possess a specific, a priori set of policymaking skills, but rather a demonstrated ability to garner votes.

As a result, it is likely that most members of the 107th Congress, especially those most junior, lacked the specialized knowledge necessary either to critically analyze the law, or to comprehend its full implications, thus enabling them to avoid any liability claims. At the same time, if legislators were placed under the equivalent standard of culpability that is currently applied to corporate CEOs, nearly every former member of the 107th Congress could face criminal charges, strictly on the basis of outcome.

Given the apparent lack of precedent, it is necessary to establish a preliminary framework through which policymakers, like other professionals, may be held (reasonably) accountable for egregious violations of the public trust. Since policymakers are of the professional class, much can be gleaned through an analysis of the process by which legal liability is established in other fields. For instance, evidence-based medicine—the currently accepted scientific application of treatment protocols—is critical in the evaluation of malpractice claims. In that regard, Dr. Conrad Murray was deemed a “disgrace to the medical profession,” not because Michael Jackson died under his care, but because the treatment he provided so deviated from an acceptable practice of modern medicine.¹⁰

Thus applying the objective standard, the trial court found that Dr. Murray, as a licensed medical physician, could—as well as should—have known that the treatments provided were unacceptably risky. It seems probable that established policy protocols, as needed to evaluate the behavior of individual policymakers charged with criminal malfeasance, already exist or that they could be composed with relative ease. As a result, there seems to be an ample basis, in theory, for assertions as to the legal liability of policymakers. Although in practical terms, further clarification is required, especially as it relates to technical legal matters, the apparent commonalities between policymaking and other professions, where liability has existed for many decades, constitute a working foundation upon which to base future efforts.

Policy Misuse

Consider this: Sarbanes-Oxley had no impact on the 2008 crisis, nor is there any reason to expect that it would have had any effect on the spate of corporate crises that directly preceded it, from 2000 to 2002.¹¹ Simply put, management possesses superior knowledge of the firm, along with the requisite authority to misuse it at will,¹² assuming an intention for self-interested gains. At its optimal level, regulation is able to exert only a very limited effect, by girding the principle of reciprocity whose fragile glue precariously holds together the modern corporation.

However, it is also possible for policymakers to misuse regulation: a specific outcome that occurs when policy is assigned a role it cannot possibly fulfill—for example, when policy lacks a rational basis. The result is the imposition of tremendous and unnecessary costs upon society. In particularly egregious instances, such violations may be considered analogous to managerial shirking behaviors, in that they represent unaccepted deviations from professional norms.

Thus, not only is there a potential for the “misuse” of corporate governance regulation by policymakers—as is discussed in greater detail in other sections—but the potential effects produced by any such misuse—largely due to the sheer size and scope of policy efforts—are likely to exceed those attributable to a basic misuse of firm assets by a nonvirtuous manager.¹³ Such implications likely seem counterintuitive, as may be attributed to a deeply ingrained form of social conditioning that encourages a falsely dichotomized conceptualization of the role of the corporate manager vis-à-vis that of the “public servant.” Consider that the role of the corporate manager, as generally attributable to the profit motive, is typically considered to be fraught with moral peril:¹⁴ “Family, religion, friendship. These are the three demons you must slay if you wish to succeed in business.”¹⁵ Conversely, the role of the policymaker is generally held to be synonymous with altruism.¹⁶

However, perceptions can be misleading. Consider that, as previously noted, the rate of (proven) corporate malfeasance by the executive is relatively rare,¹⁷ and certainly not anywhere near as prevalent as it is commonly presumed. Conversely, in the public sector, the inverse condition may hold as true: Public corruption may be more frequent than is currently acknowledged. For instance, demonstrated public sector corruption is becoming more commonplace—having increased by more than 50 percent since 2003.¹⁸

Consider that in a recent two-year period more than 1,800 federal, state, and local officials were convicted of public corruption charges.¹⁹ Furthermore, 22 employees from the Robeson County Sheriff's Office (North Carolina) recently pled guilty to drug conspiracy, racketeering, and fraud, and a state legislator from Georgia pled guilty to laundering what was understood to be proceeds from illegal drug sales.²⁰ A long-term undercover operation in Arizona found that nearly 70 military and law enforcement personnel accepted hundreds of thousands in bribes, while conspiring to smuggle cocaine, drug money, and illegal immigrants across the U.S. border.²¹

The argument is not that all—or even a majority of—public servants are corrupt. Rather this discussion seeks to elicit an acknowledgment that policymakers, as human beings, may be understood to share the same moral fragilities as corporate executives. It can be reasonably assumed that, on average, professionals in both fields—despite the presence of distinct incentives²²—possess a more or less equivalent propensity to engage in shirking behaviors. Whereas—consonant with modern sensibilities—corporate executives appear rapacious almost by definition, the equivalent potential for elite policymakers to “delight in nihilism and destruction…”²³ is ignored.

The primary distinction between the rapacious CEO and the policymaker intent on destruction seems to be that “[t]heir weapons are just different.”²⁴ Conspicuously more relevant is that it may be logically demonstrated that the potential range of negative implications as stemming from policy misuse—for example, caused when policymakers shirk their direct responsibilities to taxpayers—are more onerous and extensive than those related to corporate malfeasance. Even in those limited instances when managerial shirking actually induces organizational failure,²⁵ the damages remain relatively limited in scope, as compared to the national—and potentially global—implications of monumental policy failure.²⁶

To be clear, shirking behaviors, as they relate to policymaking, have yet to be defined with any precision for the purpose of this discussion. Rather, the objective is confined to demonstrating that: (1) the expected rate of malfeasance—whether it be within the corporation or in the halls of Congress—is likely constant across the various professions (although the relevant incentives can be expected to vary), and (2) a rational expectation is for the costs associated with policy malfeasance to exceed those related to corporate malfeasance. This is to suggest that the negative societal implications that are posed by the policymaker lacking virtue exceed those ensuing from the same ethical deformity in the corporate executive.

Thus, the near exclusive focus—as peculiar to the modern era—upon corporate malfeasance,²⁷ absent any commensurate standards for policymakers, is difficult to justify, whether on the basis of logic or history. Consider that the first U.S. president, cognizant of such threats to the national welfare, warned of a day when “unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.”²⁸

The Case for Culpability

As it pertains to Sarbanes-Oxley, it is necessary to objectively evaluate whether there exists a sufficient rational basis for a plausible assertion as to the legal liability of senior policymakers. This is to imply that Sarbanes-Oxley's chief proponents should have known both: (1) that policy failure was a reasonable expectation, and (2) that its revolutionary nature subjected corporate America and the U.S. economy to unacceptable levels of risk. The particular process employed by Congress is no less revealing than the law's content. Sarbanes-Oxley's hasty concoction²⁹ required just six months in a town—Washington, DC—that is notorious for stalling legislation: Even bills with bipartisan support commonly take years to even be considered at the committee level.

In light of the comprehensive nature of the law, the experimental nature of its provisions, and the fact that it focused squarely upon corporate America, it may be argued that the specific actions undertaken, like those of Dr. Conrad Murray, were in fact negligent, implying a seeming disregard for the likely consequences of an extremely risky policy that, from day one, had little chance of success.³⁰ At the very least, it is a failure that could—and should—have been easily averted. Equally conspicuous was Congress's decision to eschew the wealth of relevant and reliable empirical research³¹ that—by providing a strong rational basis for U.S. corporate governance regulation—would have effectively guided lawmakers out of the quagmire, thus averting a costly policy failure.

The presence of a serious procedural dysfunction seems apparent, not only in the final vote tally—one reflecting all but unanimous support—but also in various procedural anomalies. Consider that the policy enactment of Sarbanes-Oxley exhibited all of the primary characteristics of a groupthink³² process. These include an unfounded³³optimism in support of the underlying vision;³⁴ a collective rationalization in which repeated admonitions from leading experts are rejected out of hand;³⁵ an unfounded belief in the inherent morality of the crusade (i.e., one led by Arthur Levitt on behalf of the “individual investor”); a stereotyped view of the out-group (i.e., corporate executives cast as criminals so as to foment public agitation with the status quo); direct pressure on members of Congress to vote for the law, and to refrain from expressing public criticism toward it; and near complete insulation from alternative points of view.

The circus environment—one created by the mind-numbing barrage of media coverage, the shrill accusations of self-proclaimed “public servants,” and tawdry reports of CEO excesses—that surrounded the process not only insulated Congress from any requirement that it seek a qualified second opinion, but helped to create a new public enemy: the corporate CEO. As a result, Sarbanes-Oxley received broad public support,³⁶ given its perception as a “legislative coup” of Corporate America.

The degree to which the formal definition of groupthink aptly describes Sarbanes-Oxley's enactment process is particularly uncanny. For instance, a notable lack of dialogue, as realistically required to flesh out competing policy approaches, was apparent. Questions regarding the dominant (regulatory) perspective were treated as efforts to stall or obstruct what was deemed obvious progress. Blithely dismissed, without consideration, was any possibility that the final policy, once imposed upon the American economic engine, might cause greater harm than good.³⁷

Equally rejected was any alternative—for example, investor diversification—not requiring a comprehensive retooling of corporate America. The 107th Congress's noted disavowal of any reliable empirical information³⁸—as might ordinarily be expected to guide the regulatory development process—further adds to a perception of systemic failure.³⁹ So too does the behavior of various Congressional leaders who expressed tremendous hubris⁴⁰ in the ability of lawmaker to “arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard.”⁴¹

Thus, the casual—arguably flippant—nature of the procedural treatment afforded such an enormously weighty economic issue is inexplicable, lacking any reference to groupthink processes. The salience of this fact is belied by the historical record: Ultimately, fewer than 1 out of 100 innovations of this type ever succeed.⁴² Whereas this raises further concerns about Sarbanes-Oxley, more importantly it offers strong evidence that the extant corporate governance dialogue has all but failed. It also suggests that the root cause of the repeated failure of modern U.S. corporate governance regulation to achieve its intended objectives is its lack of mooring in a secure, rational foundation.

The content of the law is no less problematic: Its extreme nature is difficult to justify, based on a comprehensive analysis of the economic conditions current at that time.⁴³ Consider the following, intentionally basic, analogy: Within a brief span of time several prominent individuals—all apparently in prime vigor—die unexpectedly from heart failure. Well-meaning civic leaders, aided by a ceaseless barrage of media coverage, all dramatically distort the issue to the extent that: (1) a wide range of healthy Americans develop a morbid fear of unexpectedly dying from heart failure, resulting in widespread public pressure for the government to intervene; and (2) blame is squarely attributed to modern medicine, and especially to cardiologists, most of whom are portrayed as criminally malfeasant.

To subdue the rising panic, Congress convenes an emergency session, which has all the elements of a political circus: Brave legislators threaten to “drag heartless physicians” to jail, while affirming their commitment to reversing the “alarming decline in national health.” After repeated, lengthy meetings with leaders of the pharmaceutical industry behind closed doors, Congress all but unanimously passes a sweeping new heart-attack law, one that promises to “effectively eliminate” all heart-attack–related fatalities by legally proscribing certain segments of the population from having heart attacks.

Meanwhile skeptics who express doubt as to Congress's ability to achieve the intended objectives are lampooned in the media as “wanting people to die.” All physicians, under the threat of criminal law, are now required to ignore established treatment protocols—derived through decades of evidence-based medicine—in favor of highly prescriptive “treatment regimens” devised by Congressional staff over the course of a few weeks. Complete authority to implement the new law is granted to a single organization with no public accountability.

Nearly a decade later, multivious reports document a dramatic, inadvertent rise in health-care costs, and a significant increase in heart attack fatalities. However, the results are either ignored—for example, the public has long since forgotten about the law—or they are carefully attributed to a “complex array of factors,” neatly rendering any causal attributions as “purely speculative.”⁴⁴ Congress then enacts a new law—“nod-and-a-wink”—proscribing certain segments of the population from developing cancer.

If lawmakers sincerely believed that Sarbanes-Oxley's legitimacy required consonance with established precedent, as reflected in U.S. corporate governance jurisprudence, the argument for adding to the already existing regulatory burden is fuzzy at best. An objective analysis of the exigencies at that time suggests, to the contrary, a legislative response as characterized by constraint, forbearance, and temperance.⁴⁵ Thus a brief statement extolling the benefits of investor diversification seems, in hindsight, to have been particularly warranted. Although a relatively insignificant measure, it would have proved less futile and vastly more cost-effective than the alternative course of action selected.

This is not to ignore the obvious political realities: the “panicked reaction of an electorate”⁴⁶ when confronted with rising investor angst—for example, as fomented by Arthur Levitt and the relentless media barrage—forced Congress's hand to give immediate consideration to new (corporate governance) legislation. However, a symbolic vote on a relatively superficial measure may have satiated the rising public demand for a government “solution.” The precise motivation for the “overzealous political and regulatory reaction”⁴⁷ is, contrary to popular logic,⁴⁸ unclear. To employ an analogy, 423 members of the House and 99 members of the Senate voted to impose a prolonged regimen of chemotherapy on a patient who was, at the time, quite robust.

The Improbability of Accountability

The argument in favor of equal accountability for policymakers is logically supported by an understanding of what it means to be a member of a professional class: to share in rewards commensurate with the level of responsibility attained. To enjoy virtually unlimited awards, without any share of constraints, may match the demands of an aristocratic society, or of the former Soviet Republic, but it is decidedly un-American. Despite this fact, it is a development that is extremely unlikely for several reasons. The first, and perhaps most relevant, is a general lack of transparency—one preventing the average citizen from being able to discern a causal link between a specific policy and the results obtained, no matter how significant or onerous they might be.

There are instances where causal attribution is more immediate: Legal liability fell upon Francesco Schettino for the Costa Concordia tragedy,⁴⁹ one that took the lives of several passengers and crew members, due to his role as captain; Dr. Conrad Murray was charged—and ultimately found guilty—in the death of Michael Jackson because, as the treating physician, he prescribed the drug that ultimately took Jackson's life. In such instances, the support for assertions of legal liability appears strong: Survey data, for instance, suggests that a majority of Americans consider the 25-year sentence received by ex-WorldCom CEO Bernard Ebbers as either fair or not harsh enough.⁵⁰ However, legal liability claims, as attached to policymakers, are bound to be fraught with enormous complexity, so as to overwhelm the legal system. As a result, it is a development that is likely to be fiercely resisted—potentially even by those who strongly approve of the idea on the basis of equality under the law, but who fear the potential implications for our courts.

Thus, it is unlikely that Sarbanes-Oxley's chief advocates will ever be compelled to give a serious public reckoning for their actions due to a general inability to effectively discern a causal link between the law and its effects. Simply put, the general public—unlike many researchers and others with specialized training—lacks the requisite means necessary to discern abject policy failure.⁵¹ Consider, for instance, that unwarranted confidence in Sarbanes-Oxley's protective umbrage has continued unabated, despite the plethora of empirical evidence suggesting that none was ever offered in the first place.⁵² Over time, rather than come to acknowledge the law's failure, it has simply been banished from memory,⁵³ thus giving legislators a free hand to enact equally spurious (e.g., Dodd-Frank) corporate governance laws.

Thus, during a period that witnessed a dramatic increase in investor susceptibility to corporate malfeasance—“And, uninvited, came to the Fox Dinner.”⁵⁴—the ability of investors to discern this as the actual outcome has not kept pace. Consequently, effectively discerning any link between the senior policymakers most responsible for Sarbanes-Oxley and the deleterious outcomes they produced is, for all practical purposes, likely to prove no less than impossible.

A second factor that would effectively limit any effort to ascribe legal accountability to policymakers is a natural human inclination to defer to autonomous power. For instance, to publicly profess Joseph Stalin a tyrant, from the relative comfort afforded by posterity, is an act that requires neither insight nor courage. However, when the culprit is both a contemporary and a highly esteemed personage—one, whether elected or not, who helps to craft important U.S. policies—public attributions of this sort are less likely.

John Stuart Mill suggests that deference to the ruling class is an innate human tendency: “the sovereign Many have let themselves be guided (which in their best times they always have done) by the counsels and influence of a more highly gifted and instructed One.”⁵⁵ Capable leaders, such as Arthur Levitt, appear so that “in advance of society in thought and feeling”⁵⁶ the potential for the faintest attribution of guilt—even in response to mounting evidence of a significant, individual contribution to abject policy failure—can be almost entirely ruled out. As a result, Sarbanes-Oxley's chief proponents—to this very day—are in no way affected by the specific outcomes they helped facilitate, but instead continue to reap the wealth of benefits that is bestowed upon the luminaries of modern society.

Ironically, in the wholly unlikely event that public sentiments were to turn in favor of even the mildest form of policymaker accountability (e.g., public reproof), Sarbanes-Oxley's chief proponents would almost certainly seek solace in the very mechanism they denied the corporate executive: mens rea.⁵⁷ By claiming a lack of intentionality as to the wealth of unwanted outcomes produced,⁵⁸ such individuals would seek—and likely receive—public exoneration. This is despite the fact that Sarbanes-Oxley denied the corporate executive⁵⁹ facing charges of incomparably lesser severity access to the same legal defense. In the case of Sarbanes-Oxley, it is a severity that is not to be underestimated:⁶⁰ Leaders—chief among them Arthur Levitt—compelled America to reject a proven legacy of jurisprudence in favor of a hastily concocted, experimental⁶¹ slew of costly and ineffective corporate governance mechanisms.⁶²

The pronounced vocal and demonstrative leadership exhibited by such luminaries over a period of several years led America down the primrose path toward the era of Sarbanes-Oxley regulation, thus creating a diversity of effects that, it may be reasonably argued, should have been readily foreseeable, given, especially in light of Mr. Levitt's pedigree, intellect and acumen. “Sarbanes-Oxley has made a fetish of compliance with complex regulations as a substitute for good judgment. This has not made American corporations any more stable or profitable, but it has damaged our competitiveness and weakened our domestic financial markets.”⁶³

The exalted public image that continues to be enjoyed by such leaders defies the ruinous nature of the outcomes resulting from their actions, just as it renders futile any hope that they will ever be requested—however politely—to render even the slightest account. Contrary to any notions of American egalitarianism, this reflects a one way “moral surrogacy”—a societal arrangement that Mill arguably endorsed.⁶⁴

Conclusions

This discussion has been largely theoretical, though it is not without practical implications. It had two primary objectives: (1) to present a persuasive, rational argument for making policymakers accountable, as is applied to nearly every other reputable profession, in the event of an egregious violation of the public trust, and (2) to suggest that—even in the wholly unforeseeable event that such a development were to occur—any potential claim of “policy malpractice” either stemming from or relating to Sarbanes-Oxley would likely be fraught with enormous complexity so as to potentially overwhelm the court system.

However, the fact remains that the rational basis in favor of accountability is apparently quite strong, and thus constitutes a potentially compelling argument. This applies not only to policymakers in general, but also to the specific situation as it pertains to the policy enactment of Sarbanes-Oxley. Whereas legal recourse seems particularly unlikely, it may be argued that the future quality of U.S. policy efforts requires some degree of accountability, however informal the feedback mechanism (e.g., public censure).

This is to suggest that the future of U.S. policymaking will continue to suffer as long as it is unduly influenced by third-party decision makers: influential leaders who bear not the slightest accountability, even for negligence-induced policy failures that might threaten the economic viability of a nation.⁶⁵ That the liability standards imposed upon corporate executives by Sarbanes-Oxley—for alleged offenses that are relatively minor—vastly exceed those applied to the policymakers who drafted the law should be deeply disconcerting and thus rectified.

This discussion concludes with three basic observations: (1) that different standards for policymakers and for other professionals, in theory, are not rationally justifiable,⁶⁶ though as a practical matter very real concerns exist that are likely to prevent (optimal) progress in the law; (2) that there exists a sufficient rational basis to suggest that those chiefly responsible for Sarbanes-Oxley's enactment were professionally negligent; and (3) that the resulting damages inflicted upon the U.S. economy are far greater than the sum influence of every single act of corporate malfeasance ever committed—arguably times 10—since the inception of the corporate structure.⁶⁷

The latter assertion should hardly be seen as controversial, as based upon a simple acknowledgment of the unique, historical contribution of the corporate structure to U.S. economic growth and prosperity. The public corporation, as a democratic institution, has provided an historically unprecedented opportunity for working individuals to invest, and thus take ownership in America's future. The symbiotic relationship between typically large and influential firms and individual investors facilitated an enormous creation of value, one that benefited all of American society, including those who never worked for a corporation, because of the substantive increase in tax revenues.

In comparison, it may be considered as wholly logical that a corporate governance policy contraindicated by a wealth of reliable, empirical evidence would possess only the capacity to negate value, not enhance it. Thus, the debate over corporate governance regulation in the modern era may be fraught with complexity. Conversely, the precise outcomes realized—for example, its wholesale failure to produce the intended objectives, while producing a myriad of unintended outcomes—fail to come as any surprise to the logical observer. Thus, this leads to the natural question, one that serves as the focus of the final chapter: Why Sarbanes-Oxley?

 

 

 

Notes

¹ S. Lee, Amazing Fantasy #1 (the first Spider-Man story), 1962, 5. The original quote reads: “With great power there must also come—great responsibility!” The quote was subsequently shortened for the movie version.

² P. Yeoh, “Causes of the Global Financial Crisis: Learning from the Competing Insights,” International Journal of Disclosure and Governance 7 (2010): 42–69; C. Doidge, G. A. Karolyi, and R. M. Stulz, “Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time,” Journal of Financial Economics, 91 (2009): 253; I. X. Zhang, “Economic Consequences of the Sarbanes-Oxley Act of 2002,” AEI-Brookings Joint Center Related Publication, 2005; E. Engel, R. M. Hayes, and X. Wang, “The Sarbanes–Oxley Act and Firms' Going-Private Decisions,” Journal of Accounting and Economics, 44, no. 1–2 (2007): 116–145.

³ H. B. Veatch, “The Rational Justification of Moral Principles: Can There Be Such a Thing?” The Review of Metaphysics, 29, no. 2 (1975): 217–238.

⁴ For a discussion, see: C. S. Lerner and M. A. Yaha, “ ‘Left Behind’ after Sarbanes-Oxley,” Regulation, 2007. www.cato.org/pubs/regulation/regv30n3/v30n3-7.pdf.

⁵ Ibid.

⁶ Veatch.

⁷ N. Vakkur, R. P. McAfee, and F. Kipperman, “The Unanticipated Costs of the Sarbanes-Oxley Act of 2002,” Research on Accounting Regulation, 2010; E. Engel, R. M. Hayes, and X. Wang, “The Sarbanes-Oxley Act and Firms' Going Private Decisions,” Journal of Accounting and Economics 44 (2008): 116–145; I. X. Zhang, “Economic Consequences of the Sarbanes-Oxley Act of 2002.” Journal of Accounting and Economics 44 (2007): 74–115; V. Chhaochharia and Y. Grinstein, “Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules,” Journal of Finance 62 (2007): 1789–1825.

⁸ For background information see: G. W. Lester, S. G. Smith, “Listening and Talking to Patients: A Remedy for Malpractice Suits?” Western Journal of Medicine 158 (1993): 268–272; F. J. Edwards, Medical Malpractice: Solving the Crisis (New York: Henry Holt, 1989).

⁹ For a discussion, see: N. V. Vakkur and C. Berrebi, “Addressing the Quagmire of Persistent Rural PCP shortages.” Working Paper. Available at SSRN: http://ssrn.com/abstract=2035952.

¹⁰ Associated Press, “Doctor Gets 4 Years in Michael Jackson's Death,” The Associated Press, November 29, 2011.

¹¹ For a discussion, see: J. R. Macey, “Corporate Governance: Promises Kept, Promises Broken” (Princeton, NJ: Princeton University Press); P. Ali and G. N. Gregoriou, eds., Corporate Governance: An International Perspective after Sarbanes-Oxley (Hoboken, NJ: John Wiley & Sons, 2006); R. Romano, “The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,” Yale Law Journal, 2005, 114. J. R. Macey, “Efficient Capital Markets, Corporate Disclosure, and Enron,” Cornell Law Review 89 (2003–2004): 394; W. K. Black, 2005s.

¹² W. K. Black, The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L industry (Austin: University of Texas Press, 2005).

¹³ For a background discussion, see: Yeoh; Zhang (The author estimates a $1.4 trillion price tag associated with the law, an estimate that is comparable with the author's research as to the total direct and indirect costs attributable to the law. While different authors have suggested contradictory results, Zhang's selection of event dates is generally regarded as most appropriate); see also: Doidge, Karolyi, and Stulz; P. Iliev, “The Effect of SOX Section 404: Costs, Earning, Quality, and Stock Prices,” The Journal of Finance, 50, no. 3 (2010). http://php.scripts.psu.edu/users/p/g/pgi1/iliev-2010-jf.pdf; S. B. Block, “The Latest Movement to Going Private: An Empirical Study,” Journal of Applied Finance.

¹⁴ For a general illustration, see: B. Meyers, “Proof That CEOs Are Evil Psychopaths.” October 31, 2011. http://bud-meyers.blogspot.com/2011/10/proof-that-ceos-are-evil-psychopaths.html; “Corrupt Corporate Executive, TV Tropes.” http://tvtropes.org/pmwiki/pmwiki.php/Main/CorruptCorporateExecutive.

¹⁵ C. M. Burns, cartoon owner of nuclear plant on comic series The Simpsons. As quoted from: “Corrupt Corporate Executive, TV Tropes.” http://tvtropes.org/pmwiki/pmwiki.php/Main/CorruptCorporateExecutive.

¹⁶ For a general discussion, see: M. C. Jensen, “Self-Interest, Altruism, Incentives, and Agency Theory,” Journal of Applied Corporate Finance, 1994. http://ssrn.com/abstract=5566.

¹⁷ See, for instance: M. B. Clinard, and P. C. Yeager, Corporate Crime (New Brunswick, NJ: Transaction Publishers, 2006).

¹⁸ For a discussion, see: R. S. Mueller, III, Presentation: American Bar Association Litigation Section Annual Conference, Washington DC, April 17, 2008.

¹⁹ Ibid.

²⁰ Ibid.

²¹ Ibid.

²² For a general discussion, see: Jensen.

²³ R. H. Bork, Slouching toward Gomorrah: Modern Liberalism and American Decline (New York: Regan Books/HarperCollins, 1996), 95.

²⁴ Ibid.

²⁵ H. Chua-Eoan, “The Collapse of Barings Bank: 1995,” Time, 2007. www.time.com/time/2007/crimes/18.html.

²⁶ For a discussion, see: Yeoh; Romano.

²⁷ For a general illustration, see: Meyers; “Corrupt Corporate Executive, TV Tropes.”

²⁸ M. Spalding and P. J. Garrity, A Sacred Union of Citizens: George Washington's Farewell Address and the American Character (Lanham, MD: Roman & Littlefield, 1996).

²⁹ See: Romano (“SOX was enacted in a flurry of congressional activity…”); S. M. Bainbridge, “Sarbanes-Oxley: Legislating in Haste, Repenting in Leisure,” 2006, 15 (UCLA School of Law, Law and Econ. Research Paper Series: #06-14). http://ssrn.com/abstract=899593; R. W. Hamilton, “The Crisis in Corporate Governance: 2002,” The Seventh Annual Frankel Lecture at the University of Houston Law Center, Houston Law Review 40, no. 1 (2003): 49.

³⁰ Bainbridge; Hamilton.

³¹ See: “Corporate Fraud on Trial: What Have We Learned?” Knowledge@Wharton: University of Pennsylvania, March 30, 2005. http://knowledge.wharton.upenn.edu/article.cfm?articleid=1131. (“To the extent that we think we can head off the next round of scandals—think that if we just get these cases right it won't happen again—we're kidding ourselves.”)

³² See, for instance: I. L. Janis, Groupthink: A Psychological Study of Policy Decisions and Fiascoes (Boston, MA: Houghton Mifflin Company, 1982).

³³ See: “Corporate Fraud on Trial: What Have We Learned?”

³⁴ The empirical literature critiquing Sarbanes-Oxley's lack of effectiveness could easily consume an entire volume. For a general introduction see: Romano (“…many of the substantive corporate governance provisions of SOX are not in fact regulatory innovations devised by Congress to cope with deficiencies in the business environment…”); C. L. Wade, “Sarbanes-Oxley Five Years Later: Will Criticism of SOX Undermine Its Benefits?” Loyola University Chicago Law Journal 39 (2008): 595; P. J. Wallison, “Will Independent Directors Produce Good Corporate Governance?” American Enterprise Institute for Public Policy Research, January 6, 2006; E. M. Fogel and A. M. Geier, “Strangers in the House: Rethinking Sarbanes-Oxley and the Independent Board of Directors,” Delaware Journal of Corporate Law 33 (2007): 47–48.

³⁵ See: “Corporate Fraud on Trial: What Have We Learned?” (“We have followed a mythology that if you write an elaborate code of ethics, appoint people to distribute it, and get everybody to sign off on a fat rule-book every year, this will somehow prevent major disasters. We have abundant evidence now that it simply doesn't work this way”); Romano.

³⁶ See, for instance: University of Iowa News Release, UI Researchers Find Positive Reaction to Sarbanes-Oxley Act, February 20, 2007. http://news-releases.uiowa.edu/2007/february/022007soxreaction.

³⁷ See, for instance: Romano.

³⁸ For a general overview, see: Wade; Ribstein; Hamilton.

³⁹ Bainbridge; Hamilton.

⁴⁰ Committee on Financial Services, “Sarbanes-Oxley: Two Years of Market and Investor Recovery.” U.S. House of Representatives: Washington, DC, Available online at: http://commdocs.house.gov/committees/bank/hba96550.000/hba96550_0f.htm.

⁴¹ A. Smith, The Theory of Moral Sentiments (Indianapolis, Liberty Classics: 1976), 380.

⁴² Durant and Durant, p. 35.

⁴³ See, for instance: Reynolds; Ribstein; Bainbridge; Hamilton.

⁴⁴ See, for instance: J. Leffall, “Sarbanes-Oxley Turns 5 amid Mixed Results: High Costs, Few Results Overshadow Good Portions of Regulation,” Wall Street Journal, November 9, 2007.

⁴⁵ See: Romano.

⁴⁶ For a discussion, see: Hamilton.

⁴⁷ D. Reece, “It's Risky All Round Doing Business with the Americans,” The Daily Telegraph, p. B2.

⁴⁸ For an illustration of the commonly held explanation, see: J. R. Brown, Jr., “Criticizing the Critics: Sarbanes-Oxley and Quack Corporate Governance,” Marquette Law Review 90 (2006): 309.

⁴⁹ J. Noel, “Costa Concordia ‘a Tragic Accident,’ but Is It a Rare Occurrence?” The Chicago Tribune, January 17, 2012. www.chicagotribune.com/travel/takingoff/ct-taking-off-chi 20120117,0,2934256.story.

⁵⁰ Wall Street Journal Opinion Poll, “Did Former WorldCom CEO Bernard Ebbers Receive a Fair Sentence?” Wall Street Journal, 2005. http://www.wsj.com.

⁵¹ See, for instance: R. Foster Winans, Editorial, “Let Everyone Use What Wall Street Knows,” New York Times, March 13, 2007, A19.

⁵² For a partial overview, see the following studies and/or sources: Committee of Sponsoring Organizations (COSO); Lee; Yeoh; Eaglesham; Mueller; Lerner and Yaha; Coenen.

⁵³ As a chief illustration of this tendency, see: Fisch (Even while acknowledging a multitude of problematic outcomes, the author fails to link these to Sarbanes-Oxley).

⁵⁴ T. Hood, “The Fox and the Hen: A Fable.” www.readbookonline.net/readOnLine/16215/.

⁵⁵ John Stuart Mill, “On Liberty.” Collected Works of John Stuart Mill, Vol. XVIII: Essays on Politics and Society (Toronto: University of Toronto Press, 1977), 269.

⁵⁶ Ibid., p. 222.

⁵⁷ G. O. W. Mueller, “Mens Rea and the Corporations: A Study of the Model Penal Code Position on Corporate Criminal Liability,” University of Pittsburgh Law Review 19 (1957–1958): 21.

⁵⁸ Vakkur; R. P. McAfee, and F. Kipperman, “The Unanticipated Costs of the Sarbanes-Oxley Act of 2002.” Research on Accounting Regulation, 2010.

⁵⁹ For a general discussion, see: Lerner and Yaha.

⁶⁰ Zhang (Zhang estimates a cost of $1.4 trillion, which is comparable to the author's estimates as to the direct and indirect costs of the law. Whereas different studies suggest contradictory estimates, Zhang's selection of event dates is most appropriate, in part as it includes earlier events on which information was released regarding the probability legislation would pass).

⁶¹ Romano.

⁶² For a discussion, see the following sources: Reynolds; Ribstein; Bainbridge; Hamilton; Reynolds.

⁶³ S. Schwarzman, “Some Lessons of the Financial Crisis: Seven Principles to Guide Reform, Here and Abroad,” The Wall Street Journal, November 14, 2008, http://online.wsj.com/article/SB122576100620095567.html.

⁶⁴ As argued by Sowell (1995), one way “moral surrogacy” represents an outcome that Mill himself would have preferred. See, for instance, “On Liberty.”

⁶⁵ For a discussion see: Sowell, p. 129.

⁶⁶ For a discussion, see: Veatch.

⁶⁷ For an illustration of the opposing point of view, see: J. Biden, “Cost of Corporate Fraud Far Outweighs Cost of Legal Compliance,” Mercury News and U.S. Senate, http://corporatecompliance.org/Content/NavigationMenu/Resources/FraudOutweighsCostCompliance_Biden.pdf.