Sarbanes Oxley Act Summary

Towards Metrics Based Corporate Governance

Sarbanes Oxley Act 2002 seeks to lay the ground for a culture of proactive management of risks going beyond the reactive approach that has been common so far. Typically, companies were often caught off-guard as unexpected events struck. In order to avoid the embarrassment of unmet expectations, companies took recourse to creative accounting to patch up their financial statements. The Chief Executives had a ready excuse that their responsibilities were limited to providing strategic direction to their companies. Similarly, the directors of boards of companies pleaded that their powers are limited in the presence of an omnipotent CEO and the paucity of access to information.

Sarbanes Oxley Act ensures that the senior executives have greater responsibility as well as the means to meet them. Thus, the directors of boards of companies will have direct access to company information and their committees will have independent oversight over important matters such as executive compensation, selection of auditors and governance policy. In turn, the directors will have greater exposure to liability for any negligence in the management of companies. Similarly, the chief executives will now be responsible for not only the strategic direction of the company but also its operational effectiveness. Their hands will be strengthened by additional support they will receive from the board of directors for strategic planning. In addition, they will also receive much more detailed information about their companies than was possible in the past.

Sarbanes Oxley Act provides for checks and balances that were not available in the past. Whistleblowers will now have greater protection of the law as well as the opportunity to report fraud in their companies. Similarly, the auditors of companies have to report to the independent audit committees.

Above all, Sarbanes Oxley Act seeks to make companies more transparent and vigilant by requiring the reporting of all their operational risks as well as the internal controls put in place to monitor them. Any material change in the monitoring of risks has to be reported to the shareholders in real time.

Overall, the Sarbanes Oxley Act seeks to focus the attention of companies on fortifying their companies by anticipating risks, all across the enterprise, and to take preemptive action to guard against the damage that they could wreak. The bedrock of this model of governance would be the business intelligence infrastructure that will help companies to receive information. This information will be more widely shared among the executives, shareholders and the board of directors. All the stakeholders in the company will have both the opportunity and the resources to put all their minds together to effectively manage their companies.

Featured Links: