Ted Dysart interviews veteran board counselors Richard Beattie and John Finley.
 
Do you think the Sarbanes-Oxley regulations have had the desired consequences?
SOX came about as the result of Enron and other corporate failures. There is no way to totally eliminate all such debacles but certainly SOX has improved the quality of, and confidence in, financial reporting. As to the related stock exchange reforms, it certainly has enhanced the power of independent directors.
 
What are SOX’s biggest shortcomings?
We regret that there are no checks on auditors (other than switching auditors) when they make questionable judgments. We also think it is unfortunate that SOX has resulted in an overreaction to whistleblowers, some of whom abuse that role.
 
If you could change one thing about SOX, what would it be?
It would be to modestly recalibrate the power between auditors and management which may have swung too far in the other direction.
 
What has been the most significant change for boards since SOX?
The additional time spent on oversight and process, especially by the audit committee and the nominating and governance committee. The related stock exchange reforms have also engendered a culture of independence that has empowered boards by moving certain responsibilities from the CEO to boards, and that has required more time.
 
How have the demands on individual directors changed?
The key demand is the time and attention required to fulfill the enhanced oversight role. Certainly, many directors have taken the time to become better educated in audit and corporate governance matters.
 
How has SOX changed which characteristics the nominating committee looks for in recruiting new directors?
Nominating committees or directors serving on such committees have always looked for the best directors they could find to contribute positively to the board and the corporation. SOX has put a significant emphasis on independence and so nominating committees make every effort to find truly independent directors. Many nominating committees today, rather than reviewing suggestions of the CEO, will come up with candidates themselves and only when they have two or three will the CEO typically become involved.
 
How have individual shareholders and investors been helped (or hurt) by SOX?
Individual shareholders and investors have more confidence today in board and CEO oversight and the quality of financial statements and reports.
 
Is SOX a viable long-term solution to the problems it was intended to address in corporate America?
Time will tell whether SOX is a long-term solution to previous corporate failures. It is impossible to totally eliminate financial fraud in a free-market system, but certainly SOX has put more warning systems and alerts in place.
 
In the long term, what will be SOX’s legacy?
SOX will be regarded positively, with the benefits outweighing the burdens. Directors aren’t troubled with it today, and many feel comfortable working within the requirements. Most also feel they are doing a more professional job and that has got to be good for the long-term viability of boards of directors.
 
How has the role of the CEO been altered by SOX?
The CEO has clearly lost some power and authority under the stock exchange reforms related to SOX. We don’t think many saw the extent of the change coming because the changes were somewhat subtle. But CEOs have come to appreciate that directors have more power and authority than they did before and the CEO less.
 
ABOUT RICHARD BEATTIE AND JOHN FINLEY: For almost four decades, Richard Beattie has been an integral, behind-the-scenes player in of some of Corporate America’s most significant boardroom dealings. At the law firm of Simpson Thacher & Bartlett LLP, Beattie has advised on the AOL-Time Warner and J.P. Morgan Chase-Bank One mergers. He has counseled many boards on governance issues, and currently serves as a director of Harley-Davidson Inc. and Heidrick & Struggles International Inc. John Finley is a partner in Simpson Thacher’s mergers and acquisitions group. He was involved in the Kmart-Sears merger and the Toys “R” Us private equity deal.