Strategic Management and Business Policy unit I essay and DQ question

F eatu re Story By Ed Silverstein

Years later, Sarbanes-Oxley is p art of how com panies d o business “ G e n e r a l c o u n s e l a r e a b i g d e a l in t h e o r g a n i z a t i o n a n d m u s t b e t r e a t e d t h a t w a y , ” s a y s a t t o r n e y M i c h a e l W . P e r e g r i n e .

I t h a s b e e n 13 y e a r s since the Sarbanes-Oxley Act was approved by Congress—and despite some occasional issues—SOX clearly has become a fixed part of the U.S. regulatory environment.

“The law has become part of the fabric of public company life,” Amy Bowerman Freed, an attorney at Hogan Lovells, told InsideCounsel— and she says it is “engrained in the way companies do business.”

Named for former Senator Paul Sarbanes and former Representative Michael Oxley, the far-reaching SOX law was seen as a way to improve auditing, reporting and governance of public companies and created the Public Company Accounting Over­ sight Board (PCAOB). In fact, aca­ demic studies suggest there is better financial reporting after SOX was enacted. Among those who benefit from its many provisions are inves­ tors and the public, who needed to have their trust put back into finan­ cial markets following major scan­ dals involving such companies as Enron and WorldCom.

However, attorneys say general counsel still face some challenges in complying with SOX.

“The primary ongoing challenge is to cope with the risks of and re­ sponse to corporate whistleblow­

ers,” says John Coates, who teaches at Harvard Law School and is the director of Harvard’s Center on the Legal Profession.

Under SOX, employees who report fraud are protected. Compa­ nies cannot retaliate against these whistleblowers.

“SOX generated this risk, al­ though in fairness [the] Dodd- Frank [Act] is responsible for great­ ly expanding it,” Coates says.

Another challenge from SOX for general counsel is to cope with the need to take a U.S.-based Foreign Corrupt Practices Act (FCPA)-re- quired, but SOX-enhanced control system into global markets, as U.S. companies expand through mergers and acquisitions, he adds.

Michael W. Peregrine, an attor­ ney at McDermott Will & Emery, adds that the “biggest challenge” 13 years after the law was enacted is that the new generation of board members, company executives and general counsel may be unfamiliar with the specifics of the act.

“I do worry about a new genera-

“I d o w o r r y a b o u t a n e w g e n e r a tio n o f b o a r d m e m b e r s , e x e c u tiv e s a n d g e n e r a l c o u n s e l—d o th e y u n d e r s ta n d it?”

—M ic h a e l W. P e re g rin e

tion of board members, executives and general counsel—do they un­ derstand it?” Peregrine said.

Despite these and other chal­ lenges, it is “unlikely” there will be any amendments or other chang­ es to the act in the coming years, Coates says.

“SOX itself is largely ‘in place’,” Coates says. “The bigger challenges are now coming from Dodd-Frank, SEC [Securities and Exchange Commission] rulemaking and en­ forcement, and market-driven gov­ ernance reforms.”

Also, SOX helps in response to current controversies related to in­ formation governance.

“I believe in all of the current governance controversies, the great­ er degree of transparency created by SOX and the oversight of auditors by the PCAOB helps force compa­ nies to address and remedy prob­ lems faster than in the past, with less harm to investors,” Coates says.

On the other hand, in comply­ ing with the act, smaller companies say they have had more of a burden than larger companies. “The cost is disparately borne,” Freed says.

Coates explains that any com­ pliance program “has a fixed cost, which will fall more heavily on smaller companies.” However, SOX

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was amended in the Dodd-Frank Act “to permanently exempt smaller public companies from its most burdensome requirements, and emerging growth companies are also subject to lighter regulation,” Coates says.

Moreover, it was recently report­ ed by the Protiviti consulting firm that compliance costs and audit fees related to SOX are increasing. The 2015 report says, “The larger your company, the more you will need to invest in SOX compliance.” Of the companies followed in a recent sur­ vey, external audit fees increased for more than half of the companies— during the most recent fiscal year, Protiviti adds.

Now, recent trends such as data breaches highlight weaknesses in internal controls, Freed says. Under Sarbanes-Oxley, companies need to provide annual assessments of internal controls. Management is also held accountable under Sarbanes-Oxley. “[Sarbanes Oxley] certainly has helped companies develop processes that enhance accountability,” Freed adds.

General counsel, because of the act, now have to make sure audit committees and external auditors are appropriately involved with oversight, Freed says.

“It elevates the role and impor­ tance of general counsel vis-a-vis governance,” Peregrine says about SOX, describing it as having a “transformational effect” on the role of the general counsel.

“The general counsel must have an important hierarchical position in the organization,” Peregrine adds. “General counsel are a big deal in the organization and must be treat­ ed that way.”

Before Sarbanes Oxley, general counsel were more restricted in their interactions with board members.

“The board wasn’t able to do its job fully—it wasn’t getting access to the general counsel,” Peregrine says. “The general counsel was marginalized. The board did not benefit from the general counsel’s

informed advice.” “Old school CEOs didn’t always

want general counsel to have access to the board,” Peregrine adds. “And that was a clear mandate of SOX.”

Sometimes, general counsel are still “kept out of the loop,” Peregrine says. One example is the ignition switch scandal at General Motors. An internal report from Anton R. Valukas, a former U.S. attorney, showed how the “general counsel was kept out of the loop until the very last moment,” Peregrine says. There was a culture in place at GM where the legal department did not pass the issue up to the general counsel.

There is another issue that evolved from Sarbanes-Oxley. The chief compliance officer, who may not be a lawyer, has more authority and an expanded role after the passage of Sarbanes-Oxley. With the expanded role, compliance officers can get into a conflict with the general counsel, and issues can arise since compliance officers may not benefit from the same attorney- client privilege seen by general counsel.

“The compliance officer was supposed to work in consultation with the general counsel,” Peregrine

“T h e c o m p lia n c e o ffic e r w a s s u p p o s e d to w o r k in c o n s u lta tio n w ith th e g e n e r a l c o u n s e l,”

—M ic h a e l W . P e re g rin e

says. They were supposed to work “collaboratively” with clear lines drawn: “This is what I do. This is what you do.”

Earlier this year, in an unusual twist involving SOX, the U.S. Su­ preme Court weighed in on a fisher­ man who tossed out into the Gulf of Mexico a few undersized red grou­ per to avoid arrest—and the justices found him not to be in violation of Sarbanes-Oxley in Yates v. United States. (In response to destruction of financial records, SOX prevents de­ struction of documents, records or tangible objects. That is how it could have fit in with undersize fish.)

“Having used traditional tools of statutory interpretation to exam­ ine markers of congressional intent within the Sarbanes-Oxley A c t... we are persuaded that an aggressive interpretation o f‘tangible object’ must be rejected,” Justice Ruth Bad­ er Ginsburg wrote in her opinion.

Overall, skipping the fish, what advice to general counsel makes sense when it comes to complying with SOX?

“Invest in a strong legal team ca­ pable of helping senior leadership create a culture of responsibility and stewardship,” Coates says. “That is good advice with or without SOX.” •

D e c e m b e r 2 0 1 5 • I N S I D E C O U N S E L . C O M 39

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