Renowned Silicon Valley venture capitalist Tim Draper, founder of Draper Fisher Jurvetson, predicts that Sarbanes-Oxley “will have the exact opposite effect that it intended.” One unintended consequence is the heightened legal liability of corporate board members. Draper has removed himself from all public boards because of the potential of being subject to debilitating shareholder lawsuits. Companies are having a tough time attracting qualified individuals to serve on boards. Recruitment firms are also reporting an unprecedented exodus of public company CFOs due to SOX-related fears.
SOX defenders say the law is needed to protect investors from accounting scandals. Yet a Booz Allen report shows: “More shareholder value has been wiped out in the past five years as a result of mismanagement and bad execution of strategy than was lost because of all of the recent compliance scandals combined.”
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“More shareholder value has been wiped out in the past five years as a result of mismanagement and bad execution of strategy…”
I think that is a bit of a misnomer. Stocks are valued much higher than the tangible assets that make them up. Sure one can say that there valueable intangibles in customers lists etc, but, by and large, the premium applied to the stock is an investment in the management team. The investor can speculate rightly or wrongly. To say that it is “wiped out” makes it sound like investments are more sure than they are most of the time.
Certainly not defending SOX in any way, just didn’t care for the implication that there is a sure cure to lost investment. Everything has a degree of risk, hence why people expect a return. Anything “wiped out” was based on calculated risk, whether the calculation was done well or not.
Good riddance. Corporate boards have mostly been an incestious club where they get compensated for simply going along with whatever the C*O wanted or the status quo.
This might be the only good effect of SOx, but do you really mean that the boards shouldn’t take responsibility for all the losses and incompetence they presided over? Who was on the boards at ENE, WCOM, and the others?
They often were like the Roman Senate who would even bestow honors on Nero’s horse.
I had a lot of problems with Ross Perot, but he did shake up GM’s board. He actually tried getting his car serviced at nearby dealerships and such and tried to set real goals.
Instead (and especially during the equity bubble) boards were merely yes-men and women.
Maybe now they will actually try to build and preserve the companies they are supposed to be running, managing, or overseeing.
When management missteps cause share prices to fall, management is destroying value for existing shareholders.
Tz- Prior to SOX, boards already took responsibility for losses. Board members typically own stock, so they suffer economic and reputational harm when the company goes under.
The addition of legal exposure to shareholder suits does not make board members more careful. It merely opens them up to unfair penalties in the circus atmosphere that masquerades as our court system. The common misconception is that accounting is exact. Just report honest numbers and don’t report dishonest ones. It is not that simple. Accounting involves judgment and estimation based on current business conditions and expectations. Most accounting errors are not deliberate fraud. Plaintiffs lawyers do not care about the difference. They wish to turn the legal system into an insurance policy against investor losses.
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