Risk & Compliance

Influential Delaware Judge Slams Sarbox

Describes it as a ''strange stew'' that couples sensible ideas with ''narrow provisions of dubious value.''
Stephen TaubJuly 6, 2005

Judge Leo Strine, a vice chancellor of the Delaware Court of Chancery, is no doubt a fan favorite among corporate lobbyists.

In a speech delivered in London to the European Policy Forum, Strine made it very clear that he opposes the Sarbanes-Oxley Act, describing it as a “strange stew” that couples sensible ideas with “narrow provisions of dubious value,” according to the Financial Times.

He also spoke of the “creeping intrusion” of regulatory oversight and suggested that the federal government should stay “in its traditional lane” on matters of corporate governance.

Strine wields considerable power; the FT pointed out that more than 60 percent of the Fortune 500 companies are incorporated in Delaware.

After the Enron and WorldCom scandals surfaced, said Strine, “the sour scent of hypocrisy wafted from some important congressional chambers” as federal legislators — who, during the late years of the Clinton Administration, had “helped to stymie efforts” at increasing the integrity of public accounting standards — began to support rapid action, according to the FT.

Strine did concede, however, that “many others genuinely desired a stronger federal role in corporate governance and saw an opportunity to turn their sincere beliefs into law.”

Noting that companies had to implement Sarbanes-Oxley as well as new stock-exchange rules, the judge bemoaned that the landmark governance legislation required corporate boards — particularly independent directors — to spend a huge portion of their time fulfilling regulatory mandates. “Many of these were unrelated to the core problems that gave rise to a legitimately perceived need for reform,” he added, according to a transcript of his remarks published on the Financial Times website.

He said those problems primarily involved financial fraud, and the incentive systems that led gatekeepers such as independent directors, public accountants, and corporate lawyers to fail to stop it — even, on occasion, “actively to facilitate accounting chicanery.”

But instead of a focused initiative addressing the financial integrity of listed companies, Strine maintained, Congress and the stock exchanges generated additional mandates “that have the perverse effect of impinging on the time that independent directors have to spend on monitoring their corporation’s legal compliance. “

The judge did concede that for all their costs, the new exchange rules and Sarbanes-Oxley are “modestly beneficial,” provided that regulators are flexible about giving boards leeway to implement the new mandates in a cost-effective manner. “What will be more troubling is if the federal government continues to veer out of its traditional lane in the American corporate governance system,” he added.

Delaware does not “tie down all boards with a prescriptive set of procedural mandates,” maintained Strine. “Instead, we give managers broad flexibility to chart the course they believe best for their corporations, using the stockholder franchise and fiduciary duty review to ensure managerial fidelity.”

While acknowledging the need for the federal government to enforce national laws “mandating accurate and sound accounting of corporate health, and the routine disclosure of material information to stockholders, Strine also asserted that the federal government undercuts the “innovation and flexibility that Delaware’s approach to corporation law creates.”

Strine concluded: “Congress needs to avoid stifling the wealth-creating potential of companies through costly mandates that not only do little to protect investors, but also distract boards from their fundamental duties to develop and oversee the implementation of an effective corporate strategy, to select excellent managers and to monitor the corporation’s compliance with its legal and ethical responsibilities.”