The Dark Side of Good Corporate Governance


Here is an interesting paper that argues that SOX actually encourages worse corporate governance.

We argue that obligatory compliance with stricter financial reporting rules (e.g., the US Sarbanes-Oxley Act) may entail important unintended consequences. Paradoxically, the amount of misreporting may increase because corporate boards spend more valuable resources fulfilling statutory mandates rather than involving themselves in forward-looking strategy setting. As these surveillance devices are substitute methods of gauging management quality, when boards focus on the firm's internal control and accounting system they become semi-detached from strategy – their business acumen falters. Top executives are then judged primarily on the basis of financial metrics as opposed to long-term fit. As the balance sheet review carries more weight in the board's decision-making process, the return to managerial book-cooking (a purely influence activity) and the risk of endorsing flawed business plans swell.

After reading the paper I didn't come away feeling convinced, yet at the same time, there seems to be a kernel of truth to this. If you are into this kind of thing, check it out and just skim the mathematics.