About the author: Michael W. Peregrine is a partner in the Chicago office of international law firm McDermott Will & Emery. His views do not necessarily reflect those of the firm or its clients.
Two historical events will return to public conversation this summer. Both are essential to an appreciation of ethical business oversight and the integrity of corporate financial statements.
One is the 20th anniversary of the Sarbanes-Oxley Act, enacted on July 30, 2002, with the intention of restoring public confidence in the securities markets following a series of extraordinary corporate and accounting scandals. The other is the 50th anniversary of the Watergate burglary on June 17, 1972, which ultimately exposed the capacity of the most senior of leaders to place ambition and expediency before individual responsibility and morality.
These anniversaries offer an extraordinary opportunity for recollection on the conduct and events that gave rise to many of the regulations and guidelines that shape the financial markets to this day. They may also prompt reflection on the potential for similar amoral conduct to arise in board rooms, executive suites, and the councils of government to this day.
Sarbanes-Oxley was the byproduct of a series of monumental corporate collapses in 2001-02: WorldCom, Global Crossing, and Enron. Together, they threatened the sanctity of the U.S. financial system and exposed fault lines in the established corporate governance framework.
Sarbanes-Oxley addressed a broad spectrum of factors that contributed to the scandals. The law added new penalties for obstruction of justice. It required companies to adopt more-stringent internal controls, established new standards for auditor independence, and required that each member of the audit committee be a member of the company’s board of directors and otherwise be independent. It formalized oversight of the accounting profession, adopted measures to improve the integrity of financial statement quality, prohibited interference with the audit process, and created a framework for financial officers’ code of ethics.
Sarbanes-Oxley has received criticism over the years. It has arguably imposed a compliance burden on smaller companies and increased audit fees. Critics have also suggested that it prompted growing companies to shift away from public offerings.
But its broad, positive impact on investor confidence cannot be denied. Sarbanes-Oxley has led to a dramatic improvement in financial reporting and to greater transparency for public companies. It enhanced disclosure rules, created greater executive accountability for financial reports, strengthened board independence, and increased auditor independence standards. And it also led to dramatic changes in corporate governance principles that remain in place today.
The proof is in the pudding. There haven’t been similar accounting or financial scandals over the past 20 years.
Watergate was a different animal, to the extent that the underlying conduct threatened the sanctity of the democratic process, not business operations. But it indirectly created plenty of spillover with respect to the application and oversight of fiduciary conduct within business organizations.
What began as a “third-rate burglary” was ultimately exposed to include a litany of criminal activity including campaign fraud, bribery, perjury, misprision of a felony, tax fraud, filing false sworn statements, and multiple conspiracy complaints. Almost 70 government and campaign officials resigned or were indicted, disbarred, or imprisoned. They included a Federal Bureau of Investigation director, two former attorneys general, and over 20 lawyers. Oh, yes, and the U.S. president resigned.
But the scandal’s broader, more consequential impact was the creation of a lasting fissure in the public trust of elected leaders, and confidence in the ethics of the legal profession.
Limitations were placed on campaign contributions from individuals and political action committees. Rules now govern periodic campaign finance reporting to the Federal Election Commission, the availability of public financing for presidential campaigns, and formal processes by which the attorney general can appoint, and remove, a special prosecutor. And there are new ethics laws for current and former government officials.
Over the years, a variety of federal laws have been enacted to address Watergate activity. Governance and compliance oversight principles have evolved to more closely focus on Watergate-related leadership risks such as the normalization of criminal conduct, the failure to respond to outrageous proposals with an unequivocal “no,” and the lack of an overriding cultural commitment to principle.
The legal profession has dramatically revised its rules of professional responsibility to address Watergate-related failures, particularly to provide clarity on who or what is the organizational client. (Famously, the White House counsel’s client isn’t the U.S. president, it is the Executive Office of the President of the United States.)
Yet the effectiveness of these and similar changes remains open to debate. Today’s C-suites and boardrooms are unlikely to include many who remember the Sarbanes-Oxley era, and even fewer who are familiar with the Watergate saga. But these scandals were the byproduct of human failings that never seem to go out of style: unbridled personal ambition, impulsive loyalties, pragmatic ruthlessness, and the absence of a moral compass within the organization.
And for those reasons, the gravity of Sarbanes-Oxley and Watergate remains as essential training for public leaders, corporate officers, and directors, and their anniversaries worthy of digestion and discussion by those in organizational leadership.
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