GEORGE F. LEE / GLEE@STARBULLETIN.COM Retired U.S. Rep. Michael Oxley spoke to the Hogan Entrepreneur Program Public Policy Forum sponsored by Chaminade University at the Pacific Club on Monday. Oxley's namesake Sarbanes-Oxley Act has been instrumental in improving corporate governance.

Sarbanes-Oxley doing its job, co-author says

The co-author of the Sarbanes-Oxley bill said investor confidence has been restored in the five years following the accounting scandals at Enron and WorldCom

When the accounting scandal at Enron Corp. began to unravel in 2001, U.S. Rep. Michael Oxley said he thought it was an aberration.

"A lot of people, including myself, kind of thought that," Oxley said during a lecture stop in Hawaii last week. "It was a bunch of guys who thought they were smarter than everybody else and they're pulling off this fraud ... They were perceived as the model for the 21st century corporation, but it was all a fraud and that just started the ball rolling.

"Then, along came WorldCom ... and that was the capper. WorldCom was four times larger than Enron and just sucked all the oxygen out of the room (on Capitol Hill)."

Five years later, the Sarbanes-Oxley Act of 2002 -- named after retired U.S. Sen. Paul Sarbanes, D-Md., and the now-retired Oxley, R-Ohio, -- has helped clean up corporate malfeasance and established more financial accountability by company executives, board members and auditors.

"Our goal was to restore investor confidence and the goal, I think, has been met," Oxley said. "Clearly, investor confidence is at an all-time high. The markets have almost doubled in that five years and it was based on two pillars: transparency and accountability. I think in both instances, we met that challenge."

And what if there had been no Sarbanes-Oxley Act to emerge? What would the corporate environment be like today?

"It probably would be the Wild West," Oxley said.

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It was January of 2003 and U.S. Rep. Michael Oxley was mingling at a dinner reception at the World Economic Forum in Davos, Switzerland.

Just six months earlier, Oxley, R-Ohio, and U.S. Sen. Paul Sarbanes, D-Md., had seen the corporate governance bill they had co-sponsored signed into law by President Bush as the Sarbanes-Oxley Act.

Now, here was Oxley in Davos, preparing to give an after-dinner talk about the new law, when a young man from Singapore approached him after intently staring at Oxley's name tag.

"He finally came over and said, 'I want to meet Sarbanes Oxley,' " the now-retired Oxley recalled last week during a Hawaii stop. "I said, 'Really. Why do you want to meet Sarbanes Oxley?' "He said, 'Because I never met Glass Steagall.' "

"True story," Oxley said with a laugh.

The Glass-Steagall Act of 1933, named after former Congressmen Carter Glass and Henry Steagall, separated investment and commercial banking activities in the wake of the 1929 stock market crash. The law was repealed in 1999.

Now, it's Oxley's turn to be linked to a landmark act. He said that besides providing him with a new first name -- at least to some people -- the law has been used as a paradigm for other countries in their battle against corporate corruption.

"I don't think either one of us (Sarbanes or Oxley) ever thought it would have the kind of impact that it's had -- not just nationally, but globally," Oxley said.

Oxley, who spoke before Chaminade University and University of Hawaii-affiliated audiences last week before flying on to Hong Kong, said the five-year-old law that was signed by President Bush on July 30, 2002, has been instrumental in cleaning up corporate malfeasance and establishing more financial accountability by company executives, board members and auditors.

"The goal, of course, was to restore investor confidence, which had been badly eroded with Enron and WorldCom," said the 63-year-old Oxley, who is Of Counsel with the Ohio-based law firm Baker Hostetler and nonexecutive vice chairman of Nasdaq Stock Market Inc. "We lost $8 trillion in market cap as a result of the scandal. Eight trillion dollars is more than the gross domestic product of the three largest countries in the European Union, so it was huge.

"But our goal was to restore investor confidence and the goal, I think, has been met. Clearly, investor confidence is at an all-time high. The markets have almost doubled in that five years and it was based on two pillars: transparency and accountability. I think in both instances, we met that challenge."

What the Sarbanes-Oxley Act does is establish new or increased standards for all U.S. public company boards, management and public accounting firms.

Still, there are some like U.S. Rep. Ron Paul, R-Texas, one of three members of Congress to vote against the bill, who said it was rushed into law "in the hysterical atmosphere surrounding the Enron and WorldCom bankruptcies, by a Congress more concerned with doing something than doing the right thing."

Paul said in a speech before the U.S. House of Representatives in 2005 that Sarbanes-Oxley imposes costly new regulations on the financial services industry and damages American capital markets by providing an incentive for small U.S. firms and foreign firms to deregister from U.S. stock exchanges. Earlier this year, Paul, who is campaigning for the Republication nomination for president, said reform or repeal of Sarbanes-Oxley remains one of his top priorities.

But Oxley brushes off the possibility of Paul or anyone else making major changes or repealing the law.

"It's been amazingly well-received," Oxley said. "Only the fringes, including Ron Paul, would try that, and they're not in a position to make any changes.

"Who's going to introduce a bill that says we're going to lower our standards? Given the success that we've had, the doubling of the market cap in the United States, the increasing confidence by the average investor and, in the case of Nasdaq, a record number of (initial public offerings) this year, why would we want to take a step back in the dark?"

Oxley said Congress needed to act decisively at the time in 2002 because of a large public outcry in the wake of accounting scandals at Enron and WorldCom.

"Essentially, we had become a nation of investors, and when 54 percent of the American households own stock, it's truly a situation where people were taking this very personally," he said. "They probably had stock in Enron and WorldCom. After all, how many financial advisers back then were not including Enron and WorldCom in their portfolio -- very few. So it became one of those bottom-up situations with the public demanding that the Congress respond."

Oxley disputes Paul's contention that the law was rushed.

"I don't know if it was in haste or not -- if you call eight months haste," Oxley said. "I think by Congressional standards, it was probably quick. But by most normal standards, eight months, I don't think, would be considered quick, particularly given the amount of outrage in the public that was taking place and fanned by media reports virtually daily with the latest outrage that took place with other companies besides Enron and WorldCom. It goes on and on ... Tyco, Adelphia, Global Crossing, Freddie Mae, Freddie Mac ... some of the largest corporations in the world."

Before Enron collapsed, it had been the seventh-largest corporation in the world, been voted and recognized as the most admired company of the 21st century and had been splashed on the cover of business magazines, Oxley said.

"This was a company that in the summer of 2001 was voted the most admired company," he said. "By fall, they had filed their first (financial) restatement, by late fall or early winter, they had filed their second restatement, and in December they filed for bankruptcy. So I think the shock the public responded with was quite predictable, and what the Congress did was quite predictable."

Oxley said the law is here to stay, even though it's been tweaked along the way by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, a nonprofit corporation created by the Sarbanes-Oxley Act to oversee the auditors of public companies in order to protect the interests of investors.

"The most underreported story in this whole situation has been the very responsible and responsive approach (earlier this year) by the SEC and the PCAOB to change the requirements of (Section) 404 (of the act) and to make it, as (SEC) Chairman (Christopher) Cox says, a scalable, top-down, risk-based approach to the audit," Oxley said.

"It was a major piece of legislation that goes right to the heart of what people perceive is the biggest problem in the bill. Yet, no one seems to know about it, which is one of the reasons why I'm on this mission here in Hawaii."

The PCAOB's new auditing rules, approved in July by the SEC, implemented new auditing standards and other measures to increase the accuracy of financial reports while reducing unnecessary costs, especially for smaller public companies.

Oxley was encouraged to come to Hawaii by Honolulu businessman Henry Montgomery, who has more than 40 years of experience in financial and corporate management and has been chief executive or chief financial officer for both small and large companies. He serves today as a director and audit committee member of three public companies -- Swift Energy Co., Catalyst Semiconductor Inc. and ASAT Holdings Ltd. -- and is on the board of three private companies -- DragonBridge Capital LLC and Pipeline Communications & Technologies LLC in Hawaii and Purdy Electronics Corp. in California. He also is founder and chairman of Montgomery Professional Services Corp., which conducts accounting outsourcing in the Philippines. Montgomery also is a board director of the Honolulu Symphony Society.

"That's where I see (the effect of Sarbanes-Oxley) at the public companies, but I'm beginning to sense here in Hawaii also (there's an effect) at the not-for profits," Montgomery said. "Being on the board of the symphony, I'm very concerned that we are transparent, we have our act under control, we have good internal controls and we're providing financial information in a very straightforward manner so that the board can act intelligently on the opportunities and the issues that they face."

He also sees the rules of Sarbanes-Oxley affecting private companies.

"When a private company has an ESOP (Employee Stock Ownership Plan), that changes the responsibility of the directors even though it's a private company," Montgomery said. "They now have a constituency of shareholders who are also employees, but they have bought into that company. So I think (the board has) a greater obligation to make sure that the best practices are being observed."

Oxley said one of the things that has surprised him since the bill became law is the reception it has received from other countries around the world.

"I really thought you'd have a race to the bottom -- a lot of other countries would see this as an opportunity to relax their standards and be attractive," Oxley said. "It worked just the opposite. The Japanese adopted what they call J-SOX. The European Union adopted E-SOX. Virtually every country that has a stock exchange have increased, not decreased their standards. I think that's a real tribute for what we were able to do.

"They have understood, intuitively I think, that investors are much more sophisticated, and are much more willing to ask the hard questions, before they invest their money. And that's a good thing. So you have this democratization of the capital markets worldwide, combined with globalization."

So where would the U.S. corporate world be now without Sarbanes-Oxley?

"It probably would be the Wild West," he said.

Oxley said every so often he's asked why Congress didn't pursue such a bill 10 years ago and avoided the problems that followed.

"Well," he said, "we're not very good at looking around corners in Congress. Believe me, I could have introduced the Sarbanes-Oxley bill back in 2001 or 2000 and it wouldn't have gotten anywhere -- even in my own committee. So it was driven by public opinion, which is true with most cases.

"Congress is very good at responding to public outcry. We're not very good at predicting the future or trying to change things where we're not really quite sure how they're going to come out."