The greatest economic system

After the failures in the early part of 2000, the Sarbanes-Oxley Act of 2002 has been signed into legislation. This act has made a board committee to oversee public accounting firms as well as set standard practices for those firms.

It also has made law that CEOs and CFOs must sign off on audited financial statements taking responsibility for there accuracy. There are stiff fines as well as jail sentences for those who knowingly sign off on “cooked books”.It also makes it illegal for corporations to make loans to board members or executives. The SEC is currently looking at further regulations that would make it possible for investors, under certain conditions to install board members.

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The rule has to do with the so-called proxy-access rule. The rule would allow big investors (owning 5% or more of the stock for at least 2 years) to run opposition board candidates on the proxy under certain limited circumstances.Those circumstances would be if 35% of the voting shareholders cast a withhold vote for newly nominated board members, or if a majority (of voting shareholders owning at least 1% for at least a year) voted for a resolution authorizing an election contest. Business is currently in a battle with the SEC over this issue. They believe that the current legislation in effect, along with self regulation of business is enough to restore the trust of investors and the public. I tend to agree with them.First of all, as I mentioned earlier in this paper, there are several reasons that corporations are successful or unsuccessful, not just who serves on the board. Furthermore, there has been no conclusive evidence that an insider or outsider board has any correlation to the success of the company.

In the Journal of Corporation Law, Robert W. Hamilton reports, “Nevertheless, when all is said and done, one would expect that sensitive economic and statistical analysis should detect whether or not changes in corporate governance [outside directors] have increased shareholder wealth.And that analysis does not show a consistent positive correlation” (362). Further along in the review he states, “Indeed, firms with a majority of inside directors “perform about as well” as firms with a majority of independent directors” (362).

This same inconclusive evidence as to whether or not one form of “board” is better than the other was also drawn from the Wang and Dewhirst study quoted earlier. In my research I cannot find a single scientific study that shows either insider or outsider boards has any advantage over the other in terms of the corporation’s success.So why should the SEC implement a new ruling that may allow a single stakeholder (shareholders) to have more power in the management of a company? I do not believe they should. If they implement this new rule there could be a number of undesirable results. In a Wall Street Journal article Henry A. McKinnel reports, “But in the urgency to run down misdeeds by corporate criminals.

… We do not need to construct a system that drags well-run corporations into destructive proxy fights, or to establish management by referendum by extending more direct control to shareholders” (A18).I agree with Mr. McKinnel, if the SEC implements this ruling, it would give too much power to a single group. It could also lead to several other undesirable effects; replacing solid directors and board members who have the long-term interest of the corporation in mind with directors and board members who only have short-term shareholder gains in mind, allowing for hostile takeovers by corporate raiders, as well as a board that is not congruent with the strategy of management.

With the Sarbanes-Oxley legislation and the overhaul of the NYSE and NASDAQ listing standards, enough legislation has been enacted to make some necessary corrections in the checks and balances system required for good corporate governance as well as imposing stiff penalties and fines on illegal behavior by out of control executives. Furthermore, business leaders know they are under the microscope and have initiated self regulation. The Business Roundtable published a new set of Principals of Corporate Governance in May of 2002.

These new principals address all of the problems of corporate governance issues which helped to cause the latest round of corporate failures. The new principals will help executives to implement needed changes to corporate governance so that these same problems do not appear again. Many companies are also dropping poison pill takeover defenses and golden parachute severance deals for executives in an effort to retain some of their power.Corporate America also realizes that they need to make changes in order to restore the trust and confidence of investors because without their trust companies cannot grow and if companies cannot grow the executives loose value both in terms of money as well as usefulness.

Conclusion My research shows that with all of the corrections that have been made through legislation and self-regulation, further reduction in the power of executives to run corporations could lead to unforeseen future problems in business.It is my contention that enough has been done for now and we should let the dust settle and see if these new regulations and changes in management attitude bring prosperity back to the U. S. economy. Often throughout history, when we come to a point where the excesses of a few ruin it for the rest, the government steps in and enacts too much legislation.

By doing so, they put into place mechanisms that tend to over-shift the desired effect to the other extreme.While the “invisible hand of competition” theory of Adam Smith may not be completely correct, it certainly does have some effect on controlling those individuals who are greedy and individualistic; this, along with the current legislation to correct the checks and balance system and executive over indulgence to handle those that fall between the cracks of the “invisible hand of competition” is enough to restore confidence in the greatest economic system in the world leading us to greater prosperity than previously known.