The last decade has been an economic perfect storm. Things got off to an unpleasant start with the bursting of the dot-com bubble. The Enron/WorldCom/Tyco scandals followed close behind. The past few years have featured the subprime mortgage crisis and the credit crunch precipitated by the Lehman Brothers bankruptcy. For equity investors pummeled by losses, this has been a decade to forget.
When bad things happen, human nature yearns to identify and punish whoever is responsible. Seeking protection, we also want to fix things so that such problems never occur again. However, this can be a bit like generals fighting the last war: Legislating a “one-size fits all” solution in response to a particular economic situation is rarely effective at preventing future, largely unpredictable problems. If it were otherwise, the Sarbanes-Oxley legislation enacted in 2002 would have eliminated all problems in corporate governance, financial controls, and disclosure.
That hasn’t happened. Sarbanes-Oxley has not, as many predicted when it was enacted, eliminated all corporate ills. While the legislation certainly did not create the subprime mortgage crisis, it unfortunately did not prevent it. In fact the subprime meltdown and its aftereffects may well be the best testimony that even the most comprehensive revision to American corporate governance in more than a generation could not repeal the economic cycle or pop the next “bubble” before it burst.
The reality is that no set of corporate-governance mechanisms could have forestalled a crisis of the magnitude or complexity of the one we have experienced.