Fasten your seat belts: S-O overshoots the mark. So guess who is in for a bumpy night?

• Author: Kaback, Hoffer
• Position: Quiddities

SARBANES-OXLEY and associated regulations (S-O), new NYSE rules, Conference Board recommendations, etc., are now reality. Few would deny that the American corporate boardroom landscape has experienced an historical inflection point.

In mathematics, "inflection point" describes a point on a curve having certain properties; the phrase has no judgmental content.

In contrast, in the non-abstract world where the curves of economic policy, politics, and legislation-making intersect, the creation of an inflection point tends to bring with it a discernible amount of overreaction, a palpable amount of overrefinement.

S-O has occasioned numerous law firm memoranda, seminar handouts, and comment letters to the SEC pointing out problems, uncertainties, and overreachings. While many of these cryings-out are self-serving, it remains true that, in at least some of its effects, S-O may discourage, not encourage, better governance.

In several of its elements, S-C reveals an approach that is less than grand, a perspective encompassing less than the big picture.

Let's briefly consider two examples of this:

First, under S-O an audit committee either has to have as a member a designated "financial expert" or explain why not. Now, which of the following financial experts would you like to have sitting next to you on an audit committee (and therefore also on the main board): Warren Buffett (probably the greatest investor of all time), Robert Rubin (former Secretary of the Treasury), Sandy Weill (one of the most successful businessmen in history), Rupert Murdoch (same), and James Wolfensohn (head of the World Bank)? Yet none of these financial luminaries is a financial expert for S-O purposes; an audit committee comprising all of them would contain exactly zero financial experts. For S-0, it is virtually any CFO or CPA with public company experience who is deemed the financial expert.

The problem is not just one of terminology. For S-O here shows that it exalts the bricklayer over the architect, the technician over the thinker.

Second, S-O proposed rules regarding securities lawyers ring huge potential changes in the attorney-client relationship. One of their many counterproductive consequences is the unnecessary introduction of additional difficulties for those directors with law degrees. (This is not a small group; it includes people like Treasury Secretary-designate John Snow.) These individuals would be swept up, as directors, by the stringency of the proposed...