Independent directors are a good thing: a financial advisory firm CEO argues that smart companies are treating Sarbanes-Oxley requirements as an investment in good governance--and that independent directors, rather than curbing risk and initiative, are at the core of a new dialogue with investors.

• Author: Wendelin, Scott
• Position: Viewpoint

Critics of the Sarbanes-Oxley Act of 2002 have raised concerns far beyond the usual assessment of increased compliance costs or the increased challenge of attracting new board members for America's public corporations. Indeed, some critics suggest that an unintended effect of the law is an erosion of corporate vitality.

Former Reagan Administration official Peter J. Wallison, for instance, suggested last year in a Wall Street Journal article that we are all in a bit of an economic mess because of Sarbanes-Oxley. He argues that "the CEOs and other professional managers who run these enterprises day to day" hold the answer to corporate growth and American economic prosperity through unfettered entrepreneurial effort--"to take the risks and make the investments that had previously brought the economy roaring back from periods of stagnation or recession."

Legislatively mandating any power or responsibility to independent directors, the "part-timers," is a roadmap to corporate inertia and a preference for the "safe and sure," says Wallison. "The problem is, if the main economic actors in our economy--the corporations traded on the New York Stock Exchange and Nasdaq--are now to be controlled by committees of the risk-averse and timid, we may all face a future of limited economic growth."

I suggest that critics such as Wallison continue to view Sarbanes-Oxley from a traditional, management-centric perspective, one that ignores the basic reality that management, boards of directors and shareholders of public American corporations are now interacting in a new and more open forum. I also believe that the management and boards of the most successful American corporations will use their "investment" in the law as a new and valuable asset to attract capital, to increase share values and to grow.

Over $1 billion was spent in 2003 by public U.S. corporations on Sarbanes-Oxley compliance, chiefly by hiring outside consultants and spending on systems for corporate governance. At a minimum, this investment has created a much higher awareness of governance issues among corporations, investors, the SEC, rating agencies and state and federal regulators. This investment is also reflected in the hiring of new independent board members, the frequent division of CEO and chairman of the board responsibilities and the creation of senior management positions in compliance.

Now that audit committees have been restructured, lead independents identified, meeting...