November 11, 2009
The Real Cost of Sarbanes Oxley
Posted by Erik Gerding

Isn't the real cost of Sarbanes Oxley the fact that it distracted policymakers and scholars with a debate over too much or too little while the freight train of the current crisis was bearing down? After all, didn’t the U.S. lose more global competitiveness in one week in September 2008 than it did over the previous six years of SOX?

Once attention switches from healthcare reform to financial reform, I hope we don't re-fight the last war. Policymakers and scholars have sunk costs into the corporate governance debate, but we all know how much sunk costs should count.

I also hope Congress doesn't hit Ctrl-C and Ctrl-V and uncritically use some of SOX as a template for addressing the current crisis. For examples, it would be a mistake to graft some of the corporate governance solutions of SOX - for example requiring that Boards have Risk Management Committees and ensuring that some directors on the committee are familiar with sophisticated risk management tools or mandating detailed information flows on financial risk- to deal with risk management failures. Those types of reforms strikes me as an ill fit for remedying the problems in the current crisis because they focus too much on the supply of information inside a firm and not enough on the demand for (and incentives to use) information.

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