Ask the CEO of a major company to describe what happens when Washington, D.C. politicians try to micromanage businesses through legislation. He or she may write you a book – or else just utter the two words “Sarbanes-Oxley.”
Formally known as Section 404 and informally as Sarbox, the 2002 legislation, enacted on the heels of Enron and other corporate accounting scandals, is the contemporary bête noir of free market philosophers.
Richard S. Levick
As the swift prosecutions of the late Enron CEO Ken Lay and other leaders engaged in malfeasance make clear, there were already laws on the books to deal with the out-and-out fraud that Enron and others perpetrated. From a free marketer’s perspective, Sarbanes-Oxley has succeeded mainly in saddling thousands of honest, publicly traded companies with onerous, complex, even serpentine requirements for internal accounting. The largest companies now pay millions of dollars each year just to comply with Sarbox and a whole cottage industry of consultants has arisen, specialized in helping businesses try to understand and comply with the rules.
This commentary is excerpted from the book, The Communicators: Leadership in the Age of Crisis, by Richard S. Levick and Charles Slack (Watershed Press, 2010).
There’s little doubt that well-meaning legislation places enormous burdens on companies. A 2009 article in Policy Review magazine noted that, in the years since President Reagan made regulation reduction a top priority for his administration, regulation has only grown under Democrat and Republican administrations alike. In fact, according to Policy Review, Washington’s regulatory staffers grew by 38 percent between 2000 and 2004 to nearly 240,000 full-time equivalent employees.
Some companies do better than others in recognizing political realities and in managing the inevitable, unwanted circumstances to their own benefit. A 2006 study by Lord & Benoit (one of those consulting firms that help companies deal with the legislation) compared nearly 2,500 publicly traded companies according to two criteria: how well they had implemented accounting controls to deal with Sarbox and how their stock price has fared. The study found that the stocks of companies with effective controls during the first two years of the law rose nearly 28 percent, compared with the Russell Index average of 18 percent. By contrast, those that failed to implement such controls saw their stock price drop by 5.75 percent.
The lesson is clear. Love or hate the legislation, it is here and it is not going away any time soon. Get on board and deal with it and your company can prosper. Ignore or fight or delay dealing with the unavoidable huge headache and your company will likely suffer.
Legislators pass laws. By definition, that’s what they do; that’s how they respond to crises, perceived crises, and public outcries to “do something” about a problem. Often, they simply cannot afford to consider the longer-term consequences of their legislation, especially when their own survival requires a show of action.
“Many politicians don’t even understand the legislation they’re enacting and the ramifications of it,” says Thomas C. Green, a partner in the Washington law firm of Sidley Austin LLP and a nationally recognized trial lawyer who frequently works with corporate executives in criminal and civil white collar cases. “The penalties attached to corporate crime have been ratcheted up and up over the last few years. I’m not here to engage in social commentary and address the wisdom of that,” he adds. “Suffice it to say that, rather than finding ways to interface with the corporate community and ensure that regulation is efficient and working, we just kind of ratchet up penalties.”
If Enron provided a catalyst for new laws, the financial meltdown in 2008 and early 2009 created a perfect storm of regulatory opportunity. “From the public’s perception, there were a lot of corporations that misbehaved, and that translates into the political objective,” he adds. “Obviously, there’s a lot more regulation across the board…. The SEC’s already reorganized in the aftermath of the Bernie Madoff debacle and Congress certainly has an appetite for new and additional regulation in the financial community.” (Subsequent to Mr. Green’s comments, legislation fundamentally overhauling regulation of the nation’s financial markets was approved by the U.S. Senate in a 60-39 vote.)
As a CEO, you may want to marginalize the effects of Washington on your business. However, working with the Power nearly always trumps fighting against the Power. General Electric is a primary example. By serving on President Obama’s Economic Recovery Advisory Board, Chief Executive Jeffrey Immelt put himself in a position not just to share his business expertise with the President but, presumably, to diplomatically highlight initiatives or new regulations that might unduly strap GE or business in general.
“Any prudent corporate executive needs to take account of the atmosphere that exists now, and which is likely to continue,” Green says. “That means committing considerable effort to compliance and oversight.”
One may rightly ask, if the legislators themselves don’t understand the intricacies of the laws they themselves pass, how are large corporations supposed to avoid violations? Put simply, you can’t. Not all the time, anyway.
“Corporations are huge organizations. No chief executive can police every employee and subordinate,” Green says. “The truth is that, notwithstanding the best and most attentive commitment to doing things right, there will be people [in a company] who do things wrong.”
Nowhere more than in Washington, D.C. does perception spell the difference between whether investigators give you the benefit of the doubt or use any violation as a pretext for a full-scale inquiry into your company and operations. “The way out of that dilemma, always, is to be able to demonstrate to any investigating authority that you were diligent, you were vigilant. You did have all your compliance programs and activities in place, and this particular incident was one that simply could not have been detected or foreseen,” advises Green. “If that’s the case, the corporation typically gets a pass.”
As the leader, it’s your job to set the tone, Green says. “It takes a lot of leadership at the top of the corporation because much of the moral and ethical tone of a corporation is set by its leaders. Employees take their cues from management.”
However, being realistic about compliance and Beltway oversight does not mean that you must simply sit back and wait for the legislative juggernauts to drive your own corporate destiny. You can have impact. Senators and representatives and their staffs are not experts on your industry-specific issues. They rely on experts to help them craft laws, and you can be one of those experts.
“There’s still a fair amount of access to committees [that are] considering enhanced regulations or changes in the regulatory scheme. And there is still access to their staffs,” Green says.
“What you communicate has to be sensible. It’s a waste of time to spend resources saying, ‘No, you shouldn’t regulate and change things,’ because that [strategy] gets you nowhere,” Green says. Instead, “pay attention to the intricacies of what legislators are proposing and react to that with specificity.”
It’s your job to find that seemingly innocuous three-sentence clause that could actually derail your corporate growth plans – but not because the lawmakers want to derail your corporate growth plans. As definitive practitioners of the Law of Unintended Consequences, the bill’s drafters may have no idea the wording could hurt you. They may be only too happy to make changes to specific passages on your behalf.
Before you can hope to wield such influence, however, you must be willing to accept legislation as a fact of life rather than an obstacle to be overcome. As Thomas Green says, coming to grips with that reality “is probably the most self-protective thing a company can do.”
Richard S. Levick, Esq., is the president and CEO of Levick Strategic Communications, a crisis and public affairs communications firm. He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” which is compiled by NACD Directorship magazine. Reach him at rlevick@levick.com.