When a serious breach in corporate governance suggests there may be problems in the system at large, regulators and legislators analyze what went wrong and how it can be resolved. In response, they often institute reforms and create new regulations to shape future corporate governance practices.
For example, after the stock market crash of 1929 exposed some serious problems in governance and business practices, Congress passed both the 1933 Securities Act and the 1934 Securities Exchange Act. The former required the securities industry to release relevant information to investors and prohibited securities fraud, and the latter created the
Securities and Exchange Commission (SEC)
to oversee and enforce the new regulations.
Sarbanes-Oxley
More recently, in response to a number of high-profile failures in corporate governance at Enron, accounting firm Arthur Andersen, and WorldCom, Congress passed the Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002, more commonly known as the Sarbanes-Oxley Act, after its two Congressional sponsors.
The Act addresses both the securities industry and the governance of public corporations. The corporate governance changes required by the Act include:
Stricter
accounting and reporting procedures
Rules governing
nominating and audit committees
Restrictions
on executive compensation
Executive
certification for financial reports
Protection
for whistleblowers, or company insiders who provide
information to regulators and law enforcement about
company activities
