White Noise

William Donaldson was lucky he didn't get roughed up in the Four Seasons' parking lot after Foley & Lardner's recent conference for directors and in-house counsel in Chicago.

During his keynote address at lunch, the former SEC chairman (who was a surprisingly unimpressive speaker) talked at length about how SOX is the right medicine to cure corporate America's ills. That solicited some eye rolling from the directors at my table. Donaldson then talked about how independent directors are making America's boardrooms more responsive to shareholders.

That was too much to take for one person seated at my table. He turned to me and said, "Independent directors are a disaster. They know nothing about the company, the industry or the business."

My tablemate is part of growing chorus of vocal critics of SOX (or portions of it). And that chorus is getting louder. Ken Starr, for instance, recently filed suit on behalf of the Free Enterprise Fund challenging the constitutionality of the PCAOB. That suit's ultimate goal, it seems, is to force Congress to take a second look at the Act. Soon after Starr filed suit, the SEC's advisory committee on small public companies told SEC officials they should exempt small and micro cap companies from the more onerous requirements of 404. Christopher Cox decided not to follow the recommendations, which would have exempted 80 percent of public companies from reporting on their internal controls. Then the Chamber of Commerce had its turn, releasing a none-too-flattering report accusing the SEC of being overzealous in its enforcement of securities laws.

Perhaps the most scathing criticism of SOX and its enforcers, though, came from a panel at the Foley conference that was discussing investor relations. Several panelists said investors don't really care that much about governance and the makeup of the board. They also said investors aren't too concerned when a company admits it has made an accounting error. The reason, they said, is because so many companies in the past 12 months have had to report an accounting mistake.

The fact that investors don't seem to care is a pretty shocking development. Two years ago, an admission of an accounting error would send a stock tumbling. Today it barely makes it into Section A of the Wall Street Journal. These admissions have become white noise. And that may be the most significant failure of the great experiment that is SOX.

Staff Writer

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