Corporate Governance – The ‘Newtered’ approach

SABMiller was more recently in the news with their announcement that Graham Mackay would become Chairman and continue as CEO for a year.
Meyer Kahn the outgoing Chairman explained that “The code goes on to say, ‘comply or explain why you are not complying, because we recognise that one size does not fit all’. We have explained very, very vividly to everybody, and most of them have accepted it.”
Meyer Kahn is of course referring to the UK Corporate Governance code which like South Africa’s King Report on Governance for South Africa 2009 is an unlegislated approach to corporate governance.

It has been well documented by the King Report on Governance for South Africa 2009 that the governance of corporations can be on a statutory basis, or as a code of principles and practices, or a combination of the two. Proponents of an unlegislated approach argue that a ‘one size fits all approach’ cannot be suitable given the breadth in scope of business carried out by companies. In addition to the suitability argument, the costs of compliance associated with a regulatory basis for governance have become burdensome both in terms of time and direct cost.

In his campaign speeches, former presidential hopeful Newt Gingrich touched upon his intentions to repeal the Sarbanes-Oxley (SOX) Act of 2002, which was passed in the wake of several high-profile financial scandals, including Enron, World com and Tyco. The United States of America has chosen to codify a significant part of its governance in an Act of congress known as the Sarbanes- Oxley Act (SOX). This statutory regime is known as ‘comply or else’. In other words, there are legal sanctions for non-compliance.
The Act has effectively established a system of controls and audit checks in a bid to reform public company accounting rules and avoid future financial scandals. It has however increasingly come under fire for being “a classic case of a knee-jerk government action” that has done more harm than good. Gingrich has argued that it did not prevent insolvencies and accounting shortfalls during the global economic downturn of 2008 in companies as diverse as Bear Sterns, Lehman Bros., American International Group (AIG) and Merrill Lynch.

He has also argued that an average company now takes 12 years before it can successfully issue an initial public offering (up from five years pre-Sarbanes-Oxley) because they do not have enough capital to cover the estimated $4.36 million hidden tax in yearly compliance costs – more than enough ammunition for the cost of compliance argument especially from a time and direct cost point of view.

More importantly, the Gingrich 2012 economic campaign has painted SOX as a deterrent to a free market economy. The republican ticket is focused on creating jobs through economic growth without unnecessary government intervention. Gingrich like most Republican candidates proposed to cut taxes, end subsidies and reduce regulation in order to get there. According to supply-side economics this will unshackle businesses with the ensuing growth increasing tax revenue, thereby reducing the budget deficit.

Unfortunately, however, even supply-side economics must acknowledge that Enron, World com and Tyco remain firmly entrenched in the annals of corporate governance as objective evidence of the effects of ‘unshackled business.’

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