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The Social Construction of Sarbanes-Oxley by Donald Langevoort

The Social Construction of Sarbanes-Oxley by Donald Langevoort

by Rick Turoczy on October 9, 2006

The meaning of the Sarbanes-Oxley Act–not just its words and phrases but its legitimacy–is still being contested. My paper takes a close look at SOX’s origins along with the early post-SOX evidence. There is no clear-cut answer to the question of how much SOX benefits investors; both positive and critical positions are plausible. As to costs, they are far greater than expected, but more from the way SOX has been implemented than anything that necessarily follows from the legislative drafting. Before turning to how and why implementation has occurred that way–an issue involving both politics and social construction–it considers whether there is an alternative interpretation of SOX that helps explain its motivations and likely long-term effects.

I raise the possibility that SOX’s most important effects on business may be less about investor protection per se and more about renegotiating the boundary between the public and private spaces in big corporations, a much deeper ideological issue. The legislation may reflect a political instinct that the incentive structure in the modern public corporation generates risks that require public (not just investor) accountability to be legitimate.

I suggest that the “independent” director, currently seen largely as an investor advocate, is being pushed toward becoming a “public” director whose main assignment is risk management. The paper then turns to the various interpretive communities (managers, investors, Wall Street, accountants, lawyers, regulators, the media and company employees) that are significant in contesting SOX’s meaning and how they are likely to interact, again with attention to the different ways that either support or criticism of SOX could find its voice and the behavioral impact as a result.

My prediction, consistent with neither enthusiasm nor harsh criticism of the legislation, is that the interpretive pluralism will gradually moderate both costs and benefits, though slowly tilting toward a public values account.

The Social Construction of Sarbanes-Oxley by Donald Langevoort

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