January 22, 2008
Sarbanes-Oxley and the Restoration of Distrust
Posted by Renee Jones

Thanks, Gordon, for inviting me.  I am big fan of Conglomerate, so it is an honor to be here.

Having emerged from the post-exam fog, I am finishing writing up a talk I gave at the University of Maryland Law School's Sarbanes-Oxley Conference last October, organized by Glommer Lisa Fairfax.  In my brief essay, I note that most commentators describe Sarbanes-Oxley and related corporate governance reforms as part an effort to "restore trust" in corporate America.  In contrast, I view the value in Sarbanes-Oxley's reforms as creating corporate governance mechanisms that help promote distrust.

The corporate scandals at Enron and Worldcom show how trust too often leads people astray.  The directors of Enron and WorldCom unreasonably trusted CEOs Ken Lay and Bernie Ebbers as they enriched themselves while leading their corporations to financial disaster.  As I have argued in earlier work, these and other scandals show how corporate directors are poorly positioned to monitor executives when they have strong personal relationships based on trust and loyalty.

As examples of reforms based on the need for more distrust, I point to Sarbanes-Oxley's much-maligned ban on loans and the mandatory executive sessions of independent directors required by the stock exchanges.  Both reforms introduce bright line rules that should help liberate corporate monitors from the discomfort of saying no to seemingly reasonable requests, in the case of loans, or "going behind the CEO's back" to discuss important corporate policy issues. 

In working on the piece, I have been able to pull together threads from my earlier article on social norms and corporate governance and reading and conversations that go back to my fellowship year at Harvard's Edmond J. Safra Foundation Center for Ethics.  Director Dennis Thompson's essay "Restoring Distrust" prodded my thinking as I prepared the Maryland talk.  The essay will be published in the symposium issue of the Maryland Journal of Business and Technology Law.

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