September 27, 2002
The Strengths and Inadequacies of the Sarbanes-Oxley Act
by William Baue
Social and mainstream investors alike applaud the positive reforms instituted by the Sarbanes-Oxley
Act, but also point to additional reforms needed to clean up the markets.
On July 30, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, officially known
as "An Act to protect investors by improving the accuracy and reliability of corporate disclosures
made pursuant to the securities laws, and for other purposes."
"The Act adopts tough new
provisions to deter and punish corporate and accounting fraud and corruption, ensure justice for
wrongdoers, and protect the interests of workers and shareholders," stated President Bush.
The Act, which is named after its primary architects, Senator Paul Sarbanes (D-Maryland)
and Representative Michael Oxley (R-Ohio), is organized into eleven sections. These sections deal
with such issues as auditor independence, corporate responsibility, enhanced financial disclosures,
conflicts of interest, and corporate accountability, among other things. The Act also establishes
a public company accounting oversight board.
The socially responsible investment (SRI)
community has been advocating for many of these reforms for years. While the SRI community
applauds such reforms, social investors also believe that certain necessary reforms remain
"Sarbanes-Oxley is an important set of reforms that needs to be supplemented
with additional changes to hold companies more accountable," said Social Investment Forum (SIF) President Tim Smith, who also
serves as senior vice president of socially responsive investing at Walden Asset Management.
advocated by social investors include enhanced board independence, the abolishment of staggered
boards, the expensing of stock options, and increased disclosure on social and environmental
issues, among many others.
One way to achieve board independence is to replace
staggered board elections, which insulates pro-management boards from being voted out, with annual
elections for boards of directors. The expensing of stock options, or the assignment of a monetary
value to executives' stock option compensation, represents another practice that social investors
"The average vote this year for the resolution to abolish staggered boards was
60 percent, so we know both individuals and institutions are voting with enthusiasm," Mr. Smith
said. "We've also seen a real surge on expensing of stock options. These are two examples of
issues that not only social investors but also concerned conventional investors would support."
The Sarbanes-Oxley Act leaves the issues
of board independence and staggered boards, as well as the expensing of stock options, untouched.
And while the Act deals with financial disclosure, it does not address the disclosure of corporate
environmental and social liabilities.
"The social investment community has championed
fuller disclosure on social and environmental liabilities," said Mr. Smith. "However, I believe
that such reform would resonate with mainstream investors as well."
Social and mainstream
investors alike welcome the corporate reforms instituted by the Sarbanes-Oxley Act as well as
recent moves by the Securities and Exchange
Commission (SEC) to increase the transparency of financial markets. However, the reforms left
undone may help bridge the gap between social and mainstream investors, who hold mutual interest in
secure, fair markets.
"We, and the 'we' at this point is not just social investors,
cannot afford to stop the process of reform," said Mr. Smith. "It's grinding work, but we need to
keep at it."