Preface
The global economy is swaying to and fro, reeling under the excessive pressures caused by market turmoil, unruly debt burdens, and poor and ineffective regulations that have exacerbated rather than calmed the crisis.1 The leading international regulatory agencies appear to be paralyzed by the crisis, while seeming to have little insight into its root causes. In the United States, policymakers have, out of an apparent sense of futility, sought to emulate King Canute the Great, by blithely commanding the unruly financial markets to follow a propitious trend.2
Unfortunately, the most recent event in a two-act play—referred to simply as “Dodd-Frank”—is likely to prove no more effective than its regulatory antecedent, the Sarbanes-Oxley Act of 2002, which failed miserably,3 while costing U.S. taxpayers more than $1 trillion.4 The result is the development of a U.S. corporate governance policy that notably lacks a rational basis,5 a precise outcome that has contributed significantly to the global crisis.
A major purpose of this book is to reignite a stalled policy debate—one that has witnessed more rhetoric than rational argument—so as to facilitate the development of efficacious policy, firmly moored in a secure, rational foundation. Thus, it is intended for legislators, policy makers, and analysts, corporate executives, scholars, and students of various disciplines. It employs an eclectic approach to policy analysis—one that includes a wide variety of models and analytic techniques—and thus is novel.
The comprehensive analytic approach, more than simply being unique, is entirely purposive and aims to achieve two main objectives: (1) to facilitate a three-dimensional, conceptual-level understanding of U.S. corporate governance policy as needed to achieve regulatory progress; and (2) to reach out to all sides in the debate, to encourage a vigorous and fecund dialogue, predicated on rational concerns that fully reflect U.S. economic interests. Furthermore, it seeks to clearly illustrate, at each step of the way, the research process employed, not only to serve as a useful didactic tool for students and researchers, but also to encourage the development of a new paradigm in policy analysis, as based upon an integrated analytic approach and a comprehensive, conceptual-level understanding of the policy problem.
Whereas this treatise on U.S. corporate governance regulation is both comprehensive and objective, it is unavoidable that it reflects a particular point of view and/or frame of reference. However, in order to realistically affect U.S. policy in this critical area, this work seeks not merely to provide a reservoir of useful information for like-minded believers, but also takes on a much greater task: to facilitate a neutral policy forum through which efficacious dialogue between (ideologic) opponents may be realistically achieved.
You are assembled, and my speech entreats
That I may know the let why gentle Peace
Should not expel these inconveniences
And bless us with her former qualities.6
Rather than try to appease all readers with a treatment that contributes very little to an understanding of the topic, it seeks to stimulate disputations with a decidedly rational tone—e.g., not what you might believe, but why—so as to encourage a rational foundation for U.S. corporate governance policy.
Whereas the precise topic is fraught with tremendous political implications, this book is, by intention, decidedly apolitical. Its purpose is not to push a narrow policy agenda, nor to persuade nonbelievers as to the merits of a predefined, regulatory perspective. Rather, the dominant focus is to facilitate a comprehensive and objective evaluation of U.S. corporate governance regulatory policy in the modern era. Recent efforts to provide a serious analysis of U.S. corporate governance regulation,7 while they have not been entirely lacking in terms of their insights, have been severely hampered by two fundamental obstacles, each of which reflects an opposite extreme of the same continuum:
Consider that corporate governance regulation, as an issue of tremendous national importance, is imbued with deep political, social, and economic implications, and thus is naturally of apparent concern to all Americans. However, rather than promote a fecund policy debate—one dominated by spirited, rational discourse—the high stakes involved have evoked a sort of primordial tribalism, such that any opportunity for mutual cooperation has been firmly eschewed by both sides.8
The observed result may be explained according to several factors. The first is that the underlying issue is extremely complex and messy: Distinguishing the meat from the potatoes in this stew is no easy matter, not even on the best of days. Consider that the ambiguities present are sufficient to invite disputations between even the most like-minded individuals, not to mention their influence upon those who agree on very little.
The second prominent factor that has contributed to obvious debate dysfunctions is that the differences between each side—e.g., in terms of values, preferences, individual philosophy, and economic assumptions—are both substantive and vast, such that resultant disagreements tend to transcend the particular subject matter, so as to apply to how each side characterizes their differences with the other. In another words, the very real differences extend to how each side characterizes the nature of the fundamental disagreement with the other.
As a result, there exists no neutral staring point from which to launch a debate, making efficacious policy dialogue onerous and extremely tricky. Thus, it has been very difficult, if not virtually impossible, for opposing sides to join in fruitful discussions, not to mention to work cooperatively to develop efficacious remedies to protracted policy problems that are, by definition, extremely complex.
The natural result is a national policy debate in which a firm, rational basis has been noticeably absent. An unproductive policy dialogue at a time when the U.S. and global financial markets are reeling in turmoil represents a disaster waiting to happen. As a direct consequence, two deeply flawed policies have been introduced, both of which were constructed upon the same basic foundation, and which thus share many commonalities: the Sarbanes-Oxley Act and the Dodd-Frank Act.
There is a reasonable expectation that the Dodd-Frank Act will experience the same setbacks as Sarbanes-Oxley. This is to suggest that, during the very period when the need for efficacious corporate governance policy has arguably never been greater, U.S. policy lacks anything resembling a sure footing.9 As a result, it has failed to achieve the desired results—for instance, corporate transparency, as a means of enhancing market stability, has actually decreased, and the security promised to investors has never materialized—while it has exerted a significantly negative impact upon the U.S. and global economy.
Thus, a major presumption of this book is that nothing less than a complete paradigm shift—in terms of both modern policy analysis (e.g., how it is carried out) and modern corporate governance policy—is needed to reverse the mounting damages, and to restore the fundamental integrity of U.S. policymaking. Half-measures are unlikely to prove particularly useful in this context, given the current extent of the policy deficit. This book provides policy analysts and makers alike with a blueprint for restorative change in the right direction, and represents a vital read for all concerned Americans.
Notes
1. See, for instance: P. Yeoh, “Causes of the Global Financial Crisis: Learning from the Competing Insights,” International Journal of Disclosure and Governance 7 (2010): 42–69.
2. Ibid.
3. 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.
4. I. X. Zhang, “Economic Consequences of the Sarbanes-Oxley Act of 2002,” AEI-Brookings Joint Center Related Publication. The author estimates a $1.4 trillion price tag associated with the law, an estimate that is comparable with my own 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.
5. Macey, Corporate Governance: Promises Kept, Promises Broken (Princeton, NJ: Princeton University Press, 2008); P. Ali and G. N. Gregoriou (eds.), Corporate Governance: An International Perspective after Sarbanes-Oxley (Hoboken, NJ: John Wiley & Sons, 2006).
6. William Shakespeare, Henry V, ed. Gary Taylor (Oxford, UK: Oxford University Press, 1982), 5.2: 64–67.
7. Two relatively prodigious examples are: Macey, Corporate Governance; Ali and G. N. Gregoriou, Corporate Governance.
8. See, for instance: P. Schroeder, “GAO: Regulators Need More Info before Curbing Proprietary Trading,” Financial Times, June 13, 2011, http://thehill.com/blogs/on-the-money/banking-financial-institutions/171309-gao-regulators-need-more-info-before-curbing-proprietary-trading; A. Zibel, “Senate Democrats Criticize GAO Study Related to Volcker Rule,” Wall Street Journal: Law Blog, June 13, 2011, http://blogs.wsj.com/economics/2011/07/13/senate-democrats-criticize-gao-study-related-to-volcker-rule/.
9. For a discussion, see: Macey, Corporate Governance; Ali and G. N. Gregoriou; R. Romano, “The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,” Yale Law Journal, 2005: 114.