Some of the alleged corporate crimes are surprising in their audacious simplicity, such as the undisclosed use of corporate funds by senior executives to pay for the purchase of personal property. This is robbery, plain and simple. Others were technically legal, but demonstrated an egregious disrespect for shareholder interests. For example, the former Chairman of ABB, the Swiss-based industrial conglomerate, awarded himself an US$87 million tax-free, lump sum "pension" when he stepped down as the company’s CEO, a detail he had neglected to mention to his Board or to disclose in documents filed with securities market regulators. But some violations were characterized by a sophistication that required the participation and complicity of a small army of highly trained professionals. Enron, for example, created more than 3,500 so-called Special Purpose Entities (SPEs) that frequently were structured for the explicit purpose of skirting regulatory oversight, hiding the extent of corporate indebtedness, and exaggerating earnings. Worse yet, according to recent federal indictments, the CFO and his cronies were receiving multi-million dollar kickbacks for their efforts, often with the assistance of both employees and outside advisors. As one former Enron executive explained in an April 2003 Financial Times article, "10 people alone could not pull off a US$60 billion hoax. You need lieutenants." The same could be said for most of the scandals.

How could such widespread abuse by so many continue undetected for so long? Some of the protective mechanisms that should have prevented such corporate malfeasance are embodied in a country’s legal framework, as defined and enforced by public authorities; others are established within the private sector itself by specific industry groups, such as the New York Stock Exchange and the International Accounting Standards Board. But the first line of defense is in the firms themselves, where the senior executives and the members of the boards of directors define and practice the corporate governance standards. These are the individuals who set the behavioral tone for their legions of employees and ultimately they are responsible for how well a firm adheres to the spirit and letter of the law, as well as to industry-imposed professional standards. Their personal behavior ultimately defines the ethical culture for every company, and they inflict untold damage on investor confidence when they fail to recognize the enormity of this responsibility. As the CEO of one Dutch company explained in a March 2003 Financial Times piece, "Good corporate governance does not reside in rules but in the culture of a company, as defined by executive management and the board." Apparently, however, the effectiveness of this elaborate network of checks and balances does not work very well, and has led to a severe erosion of public confidence.

The Public Policy Response

In the six months after Enron’s declaration of bankruptcy, barely a day passed without another headline revealing a new corporate scandal. Even though public outrage around the world was rapidly gaining momentum, attention predictably focused on the United States, where the presumed global leader was reeling from the exposed weaknesses in its brand of capitalism. Despite the shrill volume of indignant rhetoric, however, most pundits were initially skeptical that much would change in the United States, where well funded and politically connected vested interests are highly influential. According to conventional wisdom, a massive lobbying campaign on Capitol Hill, backed by the deep-pocketed barons of Wall Street, corporate United States and an unabashedly pro-business president, would successfully derail proposals for legislative action. As the Financial Times reported in June 2002, "A wave of enthusiasm for overhauling the nation’s corporate and accounting laws has ebbed, and the toughest proposals for change are all but dead." And a leading US Senator exclaimed with relief, "The feeding frenzy is pretty much over."

Less than a month after these prophetic pronouncements, a new federal law was in place that was as ambitious as any corporate reform legislation enacted since the 1930s. Astoundingly, the Senate voted unanimously in favor of the so-called Sarbanes-Oxley Act, and it passed by a lopsided 423 to 3 in the US House of Representatives. One week later, amidst great fanfare, US President George Bush declared a new era of corporate reform as he placed his signature on the legislation—less than eight months after Enron declared bankruptcy. The new law could hardly be labeled a global blueprint for corporate reform, but business leaders and government officials everywhere paid close attention to both the content of the legislation and the reactions of the various stakeholders. If the US system of public and corporate governance had once been considered the gold standard that other nations sought to emulate, perhaps the rapid and sweeping legislative response would also serve as a worthy example.

Although hastily patched together and far from perfect, the new law included a number of provisions designed to strengthen both public and private oversight of corporate behavior, and subject violators to far harsher penalties. For the first time, the CEOs and CFOs of all publicly listed companies must personally certify on an annual basis the accuracy of the financial statements released to regulators and the public. Equally significant, false representations now will be subject to criminal penalties, significantly upping the ante for those with a penchant for corporate corruption. The law also includes more stringent conflict of interest provisions to govern the behavior of stock analysts and tougher public disclosure requirements for off-balance sheet transactions. It even places the onus on attorneys to report to the public authorities "evidence of a material violation of securities law or a breach of fiduciary duty," and stipulates that violators will be banned from practicing before the Securities and Exchange Commission (SEC), a penalty that is tantamount to excommunication for securities lawyers. To bolster enforcement of the new law, Congress also provided the SEC with a massive budget increase, primarily to expand the professional staff.

Perhaps the most far-reaching reform instigated by the Act is the establishment of a new, five-member board, accountable to the SEC that will oversee the disgraced accounting profession. In effect, this measure puts an end to self-regulation of the industry and creates far more rigorous oversight by an independent board of distinguished experts who will have authority to set auditing rules, inspect accounting firms, and discipline auditors. Auditors, for example, will no longer be permitted to accept consulting assignments, nor will they be permitted to pass through the revolving door to be hired by the same firms that were their audit clients. These tough new provisions, not surprisingly, were met by howls of protest and a fierce lobbying campaign by business groups, the American Bar Association, and others who hoped to dilute the most onerous provisions.