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Academic Study Finds Sarbanes-Oxley Reforms had Limited Effects on Corporate Governance

A paper by academics from the University of Michigan argues that U.S. corporate governance rules place too much confidence in independent board members and insufficient emphasis on the shareholders to control and monitor top management. The researchers focused on the corporate governance reforms spurred by the Sarbanes-Oxley Act, specifically the requirements that boards: include a majority of independent directors; have an audit committee and independent audit committee members; disclose whether the audit committee membership includes at least one financial expert; and require independence of the outside auditor. The researchers wrote that the Sarbanes-Oxley requirements have not effectively improved corporate governance and have not reduced overall fraudulent activity. The researchers cite evidence showing that the number of class action lawsuits has not decreased significantly since SOX was enacted; the volume of large settlements against corporations has not declined; and that SOX has not reduced manipulative activity by the board itself in that outside directors used dating and timing techniques to manipulate their stock option grants like top executives did.  Among the authors’ proposals are checks on the recent trend toward multi-share class control structures with unequal voting rights; strengthening shareholder voting rights by making shareholder bylaw resolutions binding on boards of directors; and requiring a majority-vote requirement for the election of the board, instead of the current plurality rule.