According to (Shleifer & Vishny, 1997), corporate governance can be defined as several laws and standards that define the relationship between the senior management of companies and stakeholders, the first of which comes to the shareholders. In this paper, I will discuss the Sarbanes-Oxley Act and its impact on corporate governance in particular and the business world in general, what are the basic concepts of organizational governance, the reason for the importance of these concepts in organizational governance, and finally, the extent to which the absence of Sarbanes-Oxley Law affects organizations, with examples of companies that I used and still work for.
Sarbanes-Oxley Law:
According to (Romano, 2004), it is an American law that was passed in 2002 according to the efforts of both Senators (Paul Sarbanes & Michael G. Oxley); this law requires companies to publish their financial information through internal control systems; this law holds both the CEO and the CFO personally liable for any manipulation of financial statements, this happened as a result of several financial scandals that led to the collapse and bankruptcy of major companies and the loss of investors' money, the most prominent of which are (Enron) and (WorldCom).
The Sarbanes-Oxley effect:
Its effect lies in restoring investors' confidence in the financial markets and closing loopholes that allow public companies to defraud investors. This is done by strengthening the audit committees in these companies and imposing severe penalties of up to long prison terms if any fraud is committed (DevTech Finance, 2021).
Practical example:
After issuing this law in the United States in 2002, many countries followed this approach and adapted it according to the regulations of the same country. In 2006, the Saudi version of this American law was issued (Authority, 2006), and it was issued by the Capital Market Authority called (the Corporate Governance Law); they gave the companies a deadline to settle their financial affairs. In 2009, I was working in Saudi Arabia in a company called (Al-Tamami Investment); this company did the following to keep up with this law:
1. A comprehensive restructuring of its financial, archiving, file management, and financial statements.
2. Hiring an external accounting firm to prepare the necessary reports for implementing this law.
3. The appointment of a financial manager with a CMA certificate role was separate from that of the accounts manager.
Basic Concepts of Organizational Governance:
According to (Shleifer & Vishny, 1997), these concepts are based on three elements, and they are as follows:
Transparency: The company's management is required to explain the reasons for making decisions that affect the company's growth and profits.
Integrity takes place between the shareholders and the board of directors; all shareholders are equal before the board's members, and the board must be permanently accountable to the shareholders.
Accountability: All members of the company's board of directors are responsible for carrying out their duties professionally and not neglecting their duties to protect the company and its interests.
Why are these concepts important to governance:
The importance of these concepts lies in the protection of shareholder rights, equal and fair treatment of all shareholders regardless of the number of shares they hold, and finally, full disclosure and transparency that protects the economy of the country itself (Witt, Fainshmidt & Aguilera, 2021).
The effect of the absence of the Sarbanes-Oxley Act on organizations
I now work in New York City for a medium-sized construction company that works on government projects, although it is not a public company, however, it manages its financial files in all transparency with the government agencies that deal with it. I believe that before this law, it was difficult to hold companies' boards of directors accountable and track if any financial statements were manipulated under the pretext of denial or lack of knowledge; however, due to the severe penalties established by law, the positive impact of creating sound management for companies will have a positive effect and make them one of the tools that work on the development of the economy.
Conclusion
The importance of corporate governance lies in the fact that it is a source of reassurance for stakeholders who are interested in the prosperity, growth, and stability of the organizational entity (Gunz & Thorne, 2019); these principles work to enhance transparency and clarity, disclosure and non-misleading in financial information, and protect shareholder rights, ensuring the establishment of justice frameworks for all stakeholders and repelling conflict of interests.
References
Authority, C. M. (2006). Corporate governance regulations in the Kingdom of Saudi Arabia.
DevTech Finance. (2021). SOX Act - Sarbanes Oxley Act [Video]. YouTube. https://www.youtube.com/watch?v=ByBe7v7A0Sw&t=5s (17:50).
Gunz, S., & Thorne, L. (2019). Thematic symposium: Accounting ethics and regulation: SOX 15 years later. Journal of Business Ethics, 158(2), 293–296. Retrieved from EBSCO multi-search database in the TUW Library.
Romano, R. (2004). The Sarbanes-Oxley Act and the making of quack corporate governance. Yale LJ, 114, 1521.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The journal of finance, 52(2), 737-783.
Witt, M. A., Fainshmidt, S., & Aguilera, R. V. (2021). Our board, our rules: Nonconformity to global corporate governance norms. Administrative Science Quarterly, 1. Retrieved from EBSCO multi-search database in the Touro Library. * Read P. 1-10