Sarbanes-Oxley and EU Comply-or-Explain Not That Far Apart

The debate over whether it is better to mandate sound corporate governance or achieve such through corporate governance codes is raging, with many in Europe favoring the codes and eschewing what they see as the prescriptive mandates of Sarbanes-Oxley. In my opinion, the two schools of thought are not that far apart. The corporate governance codes generally employ a comply-or-explain tool. For example, an independent audit committee is a component of sound corporate governance. Sarbanes-Oxley mandates independent audit committees, but a governance code may require a company to have such a committee or explain why it does not have one. In my view, it is very awkward and very embarrassing for a company to try to explain to its shareholders and investors why it does not have an independent audit committee. Thus, the two methods achieve the same governance result in many if not most cases.

I believe that this is also the vision of former EU Internal Market Commissioner Frits Bolkestein, who has said that transatlantic convergence must be promoted even though the U.S. and the EU have taken different paths toward effective corporate governance. The European approach is essentially based on the principle of comply-or-explain, he has noted, while the U.S. approach is rule-based and relies more on law enforcement. Despite this divergence, the former commissioner has emphasized that both the EU and U.S. must aim for the same basic goals and converge their thinking. If this does not happen, he has warned that friction will arise, accompanied by a need for difficult downstream regulatory repair. The former commissioner is a visionary and I love the phrase ``downstream regulatory repair.’’ I think that he is saying that global companies, be they US or EU, will have to implement convergent sound corporate governance if not now, then in the future in order to satisfy the expectations of investors and the markets.