Earlier today, President Obama made a much-anticipated speech about reforming financial regulation. Financial reform is not a new item on the President’s agenda. He has advocated for this reform for about two years. And, as we all know, the recent calls for reform were ignited by the 2008/2009 economic meltdown that put our nation into a deep recession. The reform the President called for today responds to some of what is wrong with corporate governance in general, and Wall Street in particular.
But we’ve been through this before – recently. Remember the Sarbanes-Oxley Act? After a string of corporate bankruptcies and governance failures at companies like Enron, WorldCom, Adelphia, Tyco in 2001 and 2002, Congress enacted Sarbanes-Oxley in an attempt to address the managerial misconduct and accounting fraud that plagued these companies. Legislators, regulators, politicians, academics, lawyers and members of the business community argued about whether the Act was necessary, and whether it would prevent future wrongdoing.
The Sarbanes-Oxley Act attempted to close several troubling gaps in corporate governance and compliance, but legislation and regulatory reform cannot address the root causes of what went wrong at Enron at the beginning of the last decade. Legislation and regulatory reform cannot deal with what went wrong at the financial institutions and car manufacturers that were bailed out by the American taxpayers. Legislative and regulatory reform cannot prevent excessive risk taking and poor corporate governance.
Policymakers and reformers must initiate a discussion among business leaders about corporate culture itself. The discussion should include broad concepts relating to compliance, ethics, due diligence and fiduciary duty. For example, public companies should establish corporate cultures that take compliance and ethics programs seriously. Compliance and ethics officers should report directly to corporate boards in order to avoid the marginalization that frequently occurs with respect to this work. Another example - when mortgages are pooled, securitized and sold to investors, the financial institutions involved in the process must perform due diligence in order to understand what they have purchased.
Some say that the details of the reform that President Obama seeks fail to address the problems that led to the economic downturn. We, however, must not get mired in the details. Business leaders must go back to the basics of good corporate governance. And, as a nation, we must expect more from business leaders.