Jonathan Macey and SOX

In the weekend edition of the Wall Street Journal, Jonathan Macey (deputy dean at Yale Law School) embarked on an assault on SOX in an article entitled What Sarbox Wrought.  He describes the Act as an “intrusive, circulatory and duplicative grab-bag of rules” and concludes that, because of the adoption of SOX, it is “now fashionable for issuers to avoid U.S. markets.”Put aside that there is evidence suggesting that companies are moving overseas because of the improved quality of foreign trading markets–something one would think would win accolades from those who rely so extensively on market solutions.  Put aside that the decline in IPOs in the US predated the adoption of SOX and that some evidence suggests that the percentage is again increasing. 

The most interesting thing about the editorial is that the proposed solutions are not directly related to SOX at all.  Macey dismisses recent efforts to decrease the costs of compliance with Section 404.  Instead, he calls for a reduction in the “[m]assive litigation risks” and the underwriting fees that “are an order of magnitude higher in the U.S.” than elsewhere.

SOX did not increase underwriting fees, and the so-called “massive” litigation risk predated the Act (it was, after all, the impetus for the PSLRA).  If anything, the data on the Stanford Securities site (and the opinions of Joe Grundfest) suggest that, in a post-SOX world, litigation risks (at least as measured by the number of securities suits filed) are declining (2006 had the lowest number of securities class action fraud suits filed since 1996).  There is at least room to argue that independent audit committees and truly independent auditors have reduced the instances of mistake and fraud, causing a decline in litigation.

As someone sitting through the trial of former Qwest CEO Joe Nacchio, I very much doubt that the trial would be taking place had Qwest had in place the protections mandated by SOX.  (For daily coverage of the trial, by the way, go to The Race to the Bottom.) 

In fairness, Macey does mention “compliance costs” as a reason why companies are not coming to the US–a cost that was increased by SOX.  But, with the exception of the costs associated with Section 404, where Macey discounts the regulatory efforts designed to reduce them, what other compliance costs should we eliminate?  Independent audit committees?  Independent auditors?  Immediate disclosure of changes in beneficial ownership?  The need to assess internal controls?  Interestingly, there is no groundswell within corporate American to get rid of these requirements.  Even the Business Roundtable has more or less supported these provisions in SOX.

Macey is right that there needs to be a rigorous discussion of a number of issues relating to competitiveness, including high underwriting fees and concerns over “massive” litigation.  The discussion, however, needs to take place in the broader context of governance–one that includes a recognition of the abysmally low standards for the duty of care (as Disney illustrates), the abysmally low monitoring standards imposed on companies (as Stone v. Ritter illustrates), and the abysmally low standards for the duty of loyalty, one that allows a majority of “independent” directors to eliminate any consideration of the fairness of the transaction.