4. Reform Strategies

To set and introduce new corporate governance standards, reformers can apply a variety of strategies that fall in two broad categories of reform: 1) participatory reform and 2) coercive reform. The Company Law Reform Bill in the UK illustrates a participatory legislative reform strategy. The introduction of the Sarbanes-Oxley Act is an example of a coercive reform strategy.


4.1    Implementation

In March 1998, the Department of Trade and Industry (DTI) launched a long-term fundamental review of the company law and began a process of research and consultations. It would take more than seven years to complete the Bill when it was introduced in the House of Lords on 1 November 2005.[9]  This participatory process gave companies and their legal advisers ample opportunity to respond to legislative changes, to be educated and to prepare company documentation, if any, before the Bill would be in force.

Although rare in emerging markets, a similar but shorter process was used in Macedonia to develop its new 2004 company law. Over the course of the drafting of the company law, 27 public hearings with more than 2,000 participants were held (20 hearings after First Reading, 7 hearings after the Second Reading of Parliament). The hearings served both to educate and solicit feedback on drafts of the laws (See Case 1: The Passage of a New Company Law in Macedonia and the Involvement of the Private Sector).


4.2    Shock Therapies

The introduction of the Sarbanes-Oxley Act, on the other hand, was a “shock therapy” used in response to dramatic financial irregularities. In less than six months, one of “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt” was signed into law.[10] A first version of the bill was introduced on February 14, 2002. The final act was passed by Congress on July 25, 2002 and signed into law on July 30, 2002.[11]

Although “shock therapies” may be useful, they only work when enforcement mechanisms such as strong specialized and commercial courts and well funded and disciplined independent regulators are in place that can impose severe penalties and personal liabilities on directors and managers. The regulatory system in the US enables lawmakers to quickly introduce new legislation such as the Sarbanes-Oxley Act and enforce new standards, even with limited public consultation when there is no room for long term consultation processes.

 

[9] www.dti.gov.uk/cld/index.htm

[10] www.whitehouse.gov/news

[11] www.govtrack.us/congress/bill.xpd?bill=h107-3763


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.