The Legislation That Created Modern Governance

 

Three foundational federal corporate laws passed over the last 45 years shared a key goal: to renew the public's trust by strengthening corporate transparency.

 

The Foreign Corrupt Practices Act (FCPA), passed in 1977, was a reaction to the discovery of bribes made by major U.S. corporations to foreign governments. For the companies, these payments were apparently “the price of doing business.” At the time, believe it or not, bribes themselves were not illegal, but failure to disclose them to shareholders was. FCPA made the bribes illegal. The act requires companies to keep meticulous records of transactions and to establish internal accounting controls.

 

The Sarbanes-Oxley Act of 2002 (SOX) was passed after a number of corporate accounting scandals were exposed. The most egregious offenders were energy giant Enron and WorldCom, the second-largest long-distance telephone company in the country. Both went bankrupt as a result. Enron's chairman, Kenneth Lay, and CEO, Jeffrey Skilling, were both convicted of numerous corruption and fraud charges. Lay died before sentencing but faced up to 165 years in prison. Skilling, who could have been sentenced to as much as 275 years, was released from custody after serving 12 years. Sarbanes-Oxley called for additional financial record keeping and reporting, including requirement of the CEO to sign off on the accuracy of financial reports.

 

The most recent legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), was passed in response to the 2008 financial meltdown that plunged the United States into the Great Recession. When many banks were deemed “too big to fail” and were bailed out by the federal government, citizens' faith in banks was shaken. Dodd-Frank, passed in 2010, imposed restrictions on the financial services industry and established regulatory bodies to protect consumers. It also gave shareholders additional rights, including broader proxy access and the right to cast advisory votes on executive compensation.

 

In this issue, experts weigh in on how these three laws affected corporate governance and what still needs to be done to make governance as transparent and powerful as possible for businesses and stakeholders. As the authors note, additional legislation will surely be put forth, but these laws are the foundation upon which modern board service is built.