Reinventing the wheel. Yet making it worse.

After Enron’s collapse, the US government passed a new law on corporate governance. This law placed all sorts of restrictions on what directors of listed companies could do, it imposed an obligation to maintain systems of proper controls; it tightened up procedures to ensure that auditors were more independent of the directors who appointed them, allowing the auditors to report more faithfully to the shareholders who were really employing them. So far, so good… sounding.

In reality, it’s a mess. The ensuing Sarbanes-Oxley Act (so named after its senate sponsors) is an over-long mess of box-ticking specificity and officousness without much by way of principles. It’s a classic case of a bad law being passed in a hurry to achieve a noble aim. It also highlights another characteristic of America that I find irksome; the lack of willingness to look outside their own country for solutions.

In the UK, we had our corporate governance scandals a decade earlier with the likes of Robert Maxwell raiding his employees’ pension funds to bolster up his fraud ridden empire. Our response was various calmly researched evidence based reports, culminating in the UK Combined Code. The Combined Code works. You can also print it out and fold it and put it in your pocket, which always seems a good characteristic to me of well drafted laws. Its authors, especially Sir Adrian Cadbury, are eloquent champions of practical, good corporate citizenship. Many of the “innovations” of Sarbanes-Oxley were rather similar to the UK’s existing rules, yet with an impractical bent added to them. They were thus neither innovative nor efficacious. There is fairly compelling evidence that directors of US listed companies are now unwilling to take normal commercial risks, such is the fear of personal liability they work under. This risk drives up their salaries. They are cutting back fiercely on R&D. Their companies are holding excessive cash balances. In other words, they’ve become scared of their own shadows. This is a bad thing in a free market system. At the same time, accounting firms and lawyers are all making bumper fees on “S-Ox” advice to directors, which I am sure is generally a lot of money for stating the obvious, yet providing directors with a literal “get out of jail” card if anything should go wrong. The whole thing means that investment is not happening and resources are being squandered.

Perhaps it’s because we’re a small country, but in the UK we have a noble tradition of looking abroad for solutions before trying to fix problems ourselves. In my experience, we should generally look to Australia first for solutions to most problems. No nonsense Aussie pragmatism has generally solved most problems already I feel. Our national football team has recently been managed by a Swede. Our royal family are basically German. We’ve allowed our domestic car manufacturers to die, because we knew they were rubbish. Nationalism should not be allowed to get in the way of commonsense.

Sarbanes-Oxley could be greatly improved by scrapping it, especially section 404 (too tedious to bore on about why here) and replacing it with the UK’s Combined Code. But that’s not going to happen.