The core function: guidance or compliance? The former is important, but the latter is crucial. Who else but the board would do it?

• Author: Raymond, Doug
• Position: LEGAL BRIEF

AS WE APPROACH the fifth anniversary of the adoption of the Sarbanes-Oxley Act of 2002 (SOX), its critics are becoming more vocal. Many, including the U.S. Chamber of Commerce, have decried SOX's regulatory burdens and the increased costs required to comply with its obligations. Most of all, we are hearing from many quarters that the present regulatory environment is sapping the nation's entrepreneurial spirit and diverting the leadership of our public companies from encouraging innovation to instead monitoring lawyer- and accountant-driven compliance exercises.

This focus on compliance, which, it is fair to say, flows directly from the 2002 legislation, has shifted control of public company boards to "independent" directors--that is, to directors who generally do not have a direct stake in the success of the business and may not even be experienced in the company's industry. Moreover, we are told, the current regulatory environment has paralyzed bold decision making. Critics assert that boards are now too reactive and too focused on meeting in executive sessions, on whistleblower policies, and on compliance issues in general. While these critics recognize the importance of ethics and compliance, they would eschew at least some of the current focus on compliance and instead encourage the board to provide greater strategic guidance and vision.

While this criticism has some basis, it fundamentally misses the point. All companies need strong strategic vision and effective management. This is true whether the business is public or private. However, every business must also be accountable to its owners. In most private companies, including virtually all venture- and private equity-backed companies, the owners have extensive business experience and often greater industry expertise and contacts than do the company's own executives. Of equal importance, the owners are also well-suited to look out after their own interests, because they or their representatives sit on the corporate boards and are in direct and frequent communication with management. Moreover, these owners, particularly in venture- and private equity-backed companies, often have negotiated sophisticated agreements that substantially limit the actions management can take without the owners' approval.

For all these reasons, the board of a private company usually does not need to function as an intermediary between owners and managers and can instead focus on providing guidance and...