SOX is “Quack Corporate Governance”

SOX ActThere are many arguments against the Sarbanes-Oxley (SOX) Act, but I found this article from James McConvill, Principal at The Corporate Research Group, very interesting. It reads more like a research paper than a magazine article, so I’ll boil it down:

“…the great majority of company directors and executives are decent citizens with commendable virtues and objectives, rather than being untrustworthy, grubby animals with their snouts in the trough.”

His point is that SOX and other forms of external regulation aim at the bad eggs (e.g., some executives at Enron), but have the primary effect of punishing the good eggs. And the good eggs are by far the majority. The phrase “quack corporate governance” comes from the book, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance by Roberta Romano, in which I assume – full disclosure, I haven’t read it yet – the bad egg-good egg reference is heavily used.

McConvill’s argument is compelling because I think of myself as one of the good eggs. External regulation takes the negative assumption that executives are greedy bastards who have no problem growing their own wealth at the expense of the corporation and its investors. He presents data that shows the tie between executive pay and corporate performance is weak.

McConvill’s solution is also compelling. What if we started with the idea that most executives are good eggs and installed what he calls “positive corporate governance”? We should focus on what really motivates people to act in the best interest of the company. He describes how motivation increases as one moves from a job to a career and from a career to a calling. Companies would be best served by CEOs responding to a calling. This is when executives more readily put the interests of the company of their own, meaning their personal wealth is only a secondary factor. It should not come as a surprise that this is also when executives are happiest and stay the longest.

 

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