Michigan State Law Review
Through the Sarbanes-Oxley Act ("SOx"), Congress appeals to two groups, regulators and private actors. Most of the new duties and liabilities that SOx creates have limited legal substance, advancing little beyond previous rules. However, we must look further to see how regulators and private actors are responding. The SEC's rulemaking efforts directly required under SOx have not been inspiring, but SOx has helped prod the SEC into rulemaking which potentially could prove more important than all of the provisions of SOx combined: rules giving shareholders the ability to nominate directors using the corporation's proxy tools. The New York Stock Exchange and Nasdaq, prodded by the SEC in an atmosphere dominated by political pressure which led to SOx, have passed rules concerning director independence and board committee structure and miscellaneous other topics. Three recent cases suggest Delaware is deferring less to director decisions. These responses illustrate the complexity of corporate law rulemaking today. Congress ultimately has the ability to set the rules, but usually lacks the expertise and inclination. SOx showed that it may now have the inclination, though the expertise is still questionable. In response, other regulators are creating new rules. SOx also appeals to corporate officers and the directors and other gatekeepers who supposedly monitor them (this paper focuses on officers and directors). The ultimate point of most of the new rules is to induce officers and directors to act more carefully and conscientiously. Conventional law and economic analysis suggests a cynical response: companies will respond with formalities, but individuals will not work harder and more faithfully. However, fearful overreaction or strengthened norms of good behavior may lead to a more earnest, substantive response. Evidence to date suggests a complicated mix of cynicism and earnestness. Finally, SOx appeals, that is, it is an appealing reform. The new rules and induced behavioral changes supplement and strengthen an emerging system of a strong, monitoring board. The process by which new rules have emerged helps enhance its appeal: although Congress has made a highly visible show of action, it has actually left it up to better-informed regulators and private actors to determine the detailed response to the scandals. This process has left much discretion in the hands of the best-informed parties, while inducing them to make needed reforms out of fear that if they do not, worse laws will follow.
Brett McDonnell, SOx Appeals, 2004 Mich. St. L. Rev. 505 (2004), available at https://scholarship.law.umn.edu/faculty_articles/207.