Corporate Governance: Codification or Self-Regulation?

Table of Contents

I. INTRODUCTION

II. NEW ZEALAND’S APPROACH TO THE CODIFICATION OF CORPORATE GOVERNANCE
A. The New Zealand Corporate Market
B. Corporate Governance in New Zealand: Principles and Guidelines
C. NZX Corporate Governance Best Practice Code
D. Attracting International Investments

III. THE SARBANES-OXLEY ACT 2002 – PRIME EXAMPLE OF THE STRCT RULE-BASED APPROACH
A. Introduction
B. Historical Context
C. Causes of the Market Failure
1. Introduction
2. Agency Costs
3. Bubble Atmosphere
4. Gatekeeper Failure
D. Brief Account of Regulations
1. Introduction
2. Scope of Application
3. Regulations
a. Internal Monitoring
b. Gatekeeper Regulation
c. Regulation of Insider Misconduct
4. Increase in Financial Disclosure
5. Fraud Liability
E. Evaluation of SOX
1. Introduction
2. Effectiveness of Regulations
a. Independent Directors
b. Whistleblowers
c. Gatekeeper Regulations
d. Increased Disclosure
e. Increased Liability
3. Higher Costs
a. Agency Costs
b. The Effect of Stricter Liability
c. Information Costs
4. Conclusion

IV. WHY COMPLY-OR-EXPLAIN – REASONS BEHIND THE SPATE OF INCORPORATIONS
A. Introduction
B. Reasons for Substantive Regulation
C. Advantages of Self-Regulation
1. The Theory of Free Markets
2. Free Markets in the Common Law World
3. Evaluation of the Principle-Based Approach in the light of the Free-Market Theory
a. Flexibility
b. Investor Education
c. Considering New Zealand Circumstances
d. Comply-or-Explain in New Zealand

V. SUMMARY AND CONCLUDING REMARKS

APPENDIX A: GRAPH OF THE 1929 CRASH OF THE US STOCK MARKET

APPENDIX B: 9th GLOBAL FRAUD SURVEY AMONG 500 TOP CORPORATIONS CONDUCTED BY ERNST&YOUNG

APENDIX C: EMPLOYEE TRAINING ON ANTI-FRAUD POLICIES

APPENDIX E: GRAPH OF PARETO DISTRIBUTION

Corporate Governance: Codification or Self-Regulation?

Is SOX a Viable Solution for New Zealand?

I. INTRODUCTION

The stock market has gained extraordinary significance over recent years. Large proportions of society invest in equity markets in order to save for their retirement. Various bodies exist to fight abuses by executives of publicly owned companies. Parliament has created the New Zealand Securities Commission (SEC), an independent Crown entity in terms of the Crown Entities Act 2004, to fight ‘white collar fraud’ and the abuse of business ethics and the law.^[1] Numerous scandals worldwide but especially the Enron case in the United States of America (USA) at the beginning of this decade shocked investors and led to a decrease in shareholder confidence. Investors lost their trust in corporate governance techniques and the credibility of managements.

In the 1930s, in the aftermath of the 1929 stock exchange crash in the USA, Berle and Means ascertained the underlying problem of corporate governance as the separation of ownership and power.^[2] In accordance with Adam Smith,^[3] they explained that, as a basic human trait, executives never apply the same diligence when running a company as the owner of the same company might apply.^[4] This fundamental understanding is the reason for the necessity of corporate governance rules. As a protection of shareholder interests, the interests of the owners of the company, the regulator tries to set standards which create investor confidence and security.

By now the large majority of nations have implemented some form of corporate governance regime. The US government has tried to counter fraud and investor scepticism by adopting a statutory corporate governance code called the Sarbanes-Oxley Act 2002 (SOX).^[5] New Zealand, on the other hand, opted for a more voluntary approach to governance regulation based on principles rather than legal norms, which impose no legal obligation on affected parties.^[6] Farrar disapproves of his approach and calls New Zealand’s principles “bland provisions”.^[7] He fears a decrease of investments in the New Zealand market if it does not follow the US lead quickly.^[8]

This paper tries to evaluate Farrar’s proposal of imitating the US example. Section II portrays corporate governance regulations currently in place in New Zealand. It focuses predominantly on listed public companies and shows shortfalls in this area. Section III illuminates SOX and its provisions. The paper provides explanations major fraud scandals in the USA and discusses in the light of these findings the effectuality of SOX. It concludes that the US legislation has numerous pitfalls and fails to achieve necessary fraud prevention. Based on this understanding, Section IV discusses the advantages and disadvantages of a principle-based approach to corporate governance regulation. It is shown how self-regulation paired with a strong legal framework provides sufficient protection for investors and how such an approach values the theory of free markets. This author believes strongly in the efficiency of free, unregulated markets and eventually concludes with a few humble suggestions on how New Zealand might change their corporate governance regime.

II. NEW ZEALAND’S APPROACH TO THE CODIFICATION OF CORPORATE GOVERNANCE

A. The New Zealand Corporate Market

New Zealand’s corporate regime is a mixture of statute and common law principles.^[9] The underlying framework is given by the Companies Act 1993 which defines director duties, board responsibilities and shareholder control.^[10] The New Zealand economy is dominated by small to medium-sized companies with 96.3 per cent of companies falling within this category.^[11] Consequently, corporate governance regulations must match New Zealand’s unique economic circumstances.

There are currently two types of companies^[12] in place in New Zealand: companies and listed companies.^[13] The term “listed companies” describes those entities that are listed with the New Zealand Stock Exchange (NZX).^[14] Each form of company needs to have at least one or more shareholders as well as one or more director.^[15] In the year 2001, there were 270,000 registered companies in New Zealand but only 216 of these were listed with the New Zealand Stock exchange and only 139 of these were original New Zealand companies.^[16] Notwithstanding the minor share of listed public companies in the overall number of domestic companies, it has been estimated that “the total market capitalisation of the domestic equities market was approximately NZ$44 billion in 2001”.^[17] Between 1985 and 2001 market capitalisation almost tripled and in June 2000, 44 per cent of all New Zealanders owned shares.^[18]

Nonetheless, there is evidence that specifically large New Zealand companies have underperformed in recent years.^[19] Large companies, however, significantly shape the reputation of country’s economy.^[20] American but also European investors heavily rely on corporate governance practices nowadays. It casts a bad light on a country’s entire economy if large companies, which are internationally noticeable, show weak performance. In times of global equity markets, New Zealand cannot afford to have a bad international reputation.^[21] A survey conducted by McKinsey in 2000 showed that three quarters of the questioned investors found that good corporate governance was as important as the financial performance when evaluating an investment.^[22] Focusing on good corporate governance is important in order to “inspire confidence in … international investors”, to retain a strong equity market and to support underperforming large corporations.^[23] In Australia, New Zealand’s biggest rival, medium to large-size companies have been 2.5 times more successful in developing growth than their New Zealand counterparts.^[24] Considering that the NZX market capitalisation has, notwithstanding its overall success during the last two decades, only grown by $0.7 billion between 1994 and 2001,^[25] whereas the Australian market grew from $282 billion to $733 billion during the same period of time,^[26] New Zealand not only needs to be aware of its comparably less attractive market for international investors but also of the possibility that local investors might find it more profitable to invest overseas.

The slow growth between 1994 and 2001, after such severe progress in the preceding decade, might arguably be seen as an indicator that less and less local investors obtain equity of New Zealand companies and invest somewhere else instead. In the light of the fact that almost half of the population owns equity; such assumption does not appear to be absolutely far-fetched, in the author’s opinion. The words of Jane Diplock, Chairman of the SEC, that “corporate governance [in New Zealand needs to be] world-class” are, therefore, more than just a slogan.^[27] Good corporate governance can improve a company’s financial performance and its attractiveness to investors. Only through superior corporate governance can New Zealand, in the author’s view, overcome its recent capital underperformance and raise itself to one of the leading investment markets worldwide.^[28]

B. Corporate Governance in New Zealand: Principles and Guidelines

The SEC published on 16 February 2004 its report Corporate Governance in New Zealand: Principles and Guidelines (Code).^[29] Beforehand the SEC had conducted a survey among all interested parties accumulating their opinions on nine key areas relevant to corporate governance in New Zealand.^[30] These nine issues later became an integral part of the Code. The SEC issued nine principles supplemented by numerous explanatory guidelines. The Principles apply to every business equally and determine how the business is run,^[31] whereas the Guidelines are literally intended to give guidance. The principles are, stated in numerical order in the Code:

- Ethical Conduct
- Board Composition and Performance
- Board Committees
- Reporting and Disclosure
- Remuneration
- Risk Management
- Auditors
- Shareholder Relations
- Stakeholder Interests.

The SEC decided to apply the principles-based approach to corporate governance as demonstrated by the Combined Code of the United Kingdom (UK).^[32] This approach inquires guidelines on proper business behaviour and detailed disclosure upon compliance.^[33] SOX, on the other hand, represents a rule based approach demanding more detailed statutory prescription.^[34] The SEC deliberately refrained from the rule-based approach in order to meet New Zealand specific circumstances.^[35] The SEC assured New Zealand businesses that the Code would not cause any law reform or any revision of the existing law.^[36] It was agreed that a “tick-in-the-box” approach to corporate governance would not achieve the intended corporate improvements and investor confidence.^[37] Contrary to the rule-based approach, which heavily relies on sanctions, the code is not enforced. Companies are expected to disclose but this is not mandatory.^[38] This is arguably the biggest flaw of the system.

Principles in the Code are kept very brief, consisting of only one sentence each. Already shortly after its promulgation the Principles of the Code were criticised as “commonsense” and “self-evident”.^[39] The Principles sound more like slogans than actual rules. Diplock emphasizes that directors and managers “step up and take responsibility for good corporate governance” mainly by establishing a boardroom culture which embraces corporate governance as the “driver for good financial performance and for success in the capital market”.^[40] In sum, the SEC tried to establish an environment in which businesses are free to decide themselves how to define good corporate governance exactly. The SEC has only given vague orientation points. More descriptive and detailed are the Guidelines, sometimes filling an entire page with recommendations. Nevertheless, companies are not expected to report specifically against the Guidelines.^[41]

Reporting against the Principles should be conducted by explaining how the entity achieved them comprehensively displaying the entity’s policies and practices.^[42] The SEC does not ask for a particular format, however.^[43] The implementation of the Guidelines is optional and even though the SEC finds explanations for variations from the Guidelines useful, it does not require them.^[44] Krackhardt evaluates the current New Zealand version of the Principles as a “weak system” and “insufficient”.^[45] He recommends a more comprehensive code of principles based on a mandatory comply-or-explain enforcement.^[46]

C. NZX Corporate Governance Best Practice Code

Due to New Zealand’s unique market of predominantly small-size corporations, the Code applies to any kind of entity. All companies apply the Code but only issuers listed with the NZX additionally have to fulfil the requirements of the NZX Corporate Governance Best Practice Code (NZX BPC).^[47]

The NZX BPC sets principles for four main issues: Ethics, Directors, Board Committees, and the Relationship with Independent Auditors.^[48] Although fundamentally similar to the Principles of the Code,^[49] the rules laid down by the NZX PBC are by far more detailed and provide more prescriptive guidance. Nevertheless, they do not contradict the Code and are therefore similarly accepted by the SEC.^[50] The four main principles of the NZX PBC are divided in a number of subcategories dealing with main issues affecting current corporate governance. The NZX intends to enhance investor confidence through accountability.^[51] The NZX PBC provides, as the NZX gauges, “flexible principles which recognise differences in corporate size and culture”.^[52] Pursuant to NZX Listing Rule 10.5.3(i) issuers are held to disclose in their annual report “the extent to which their corporate governance structure materially differs from the NZX PBC”.^[53] Problematic is the term “material”. Neither the NZX Listing Rules nor the NZX PBC defines the term. The terminology seems relatively vague and subject to issuer assessment. Issuers might define “material” differently weighting specific variations from the NZX PBC differently. The vagueness of this terminology might lead to an unexpected and unwelcome diversity of corporate governance reporting. Although more comprehensive than the Code the NZX PBC is because of this terminology open to self-evaluation. By deciding if variations from the NZX PBC are material, the accountability of corporate conduct suffers, defeating the purpose of the code.

D. Attracting International Investments

International private investors might arguably look for a comprehensive unified code of principles to which every entity adheres in a formatted manner. Diplock has to admit that not a single company in New Zealand has reported by the nine Principle format.^[54] The New Zealand approach, from the author’s point of view, might be very flexible in suiting all sizes of firms but it indubitable lacks necessary unification to attract overseas capital. Investors are not willing to learn about a country’s legal system, the economic structure or the precise listing rules of a market. They take annual reports for granted and easily regard a market as chaotic when disclosure turns out to be inaccurate and merely a result of corporate assessment and lash principle enforcement. The main advantage of strict rules to corporate governance is its inherent clarity.^[55] The risk of loopholes, deriving from a system which allows companies themselves to decide what they would like to report on, can be eliminated through mandatory rules.^[56] Additionally, the State can control compliance and thereby guarantee good corporate governance.^[57] In the light of the pressure the US government and the US market imposes on other legislations to follow their lead, it has become necessary to re-think New Zealand’s approach to corporate governance, revise the US legislation and assess if SOX regulations truly meet the governmental intention behind it. Only if SOX appears to be a successful and appropriate piece of legislation it is worth to consider adoption. It is vital in this process to consider the chain of reasons leading to SOX and to analyse them.

III. THE SARBANES-OXLEY ACT 2002 – PRIME EXAMPLE OF THE STRCT RULE-BASED APPROACH

A. Introduction

In 2002 the US legislature passed SOX in the aftermath of the most dramatic corporate scandals in US history: Enron and WorldCom. SOX is the most comprehensive securities legislation in the USA since the 1930s^[58] and it regulates a field of law that, up to this point, had only been subject to state law and the state jurisprudence.^[59] The federal government thereby followed the long-time call of many legal scholars.^[60]

B. Historical Context

SOX is the prime example of the strict rule-based approach.^[61] It was passed without the involvement of the business community.^[62] Driving force behind the regulation process in the USA were the recent corporate scandals of Enron and WorldCom.

The Enron Corporation was a multi-billion dollar enterprise in the energy and communication sector.^[63] The Fortune Magazine put it on its “100 Best Companies to Work for in America” list in 2000.^[64] The Chief Executive Officer (CEO) Kenneth Lay and Enron’s Chief Financial Officer (CFO) Andrew Fastow engaged in numerous accounting frauds which resulted in a deception of the firm’s financial status. They had created “special purpose entities” (SPE)^[65] in order to shift debts from Enron’s books to these bogus enterprises.^[66] In 2000, Enron’s share value was extremely high at $90-per-share value and investors thought prices would rise indefinitely.^[67] This assumption was solely based on Lay’s and Fastow’s assertion that Enron would “earn returns on equity of 25 per cent forever”, a statement investors, due to Enron’s previous unstoppable ‘success’, believed unquestioningly.^[68] Eventually, Lay and Fastow encouraged shareholders to buy stock while they sold their shares at horrendous prices.^[69] In October 2001, the swindle was discovered and Enron’s executives were charged on accounts of fraud. The jury reached a verdict in May 2006 holding Lay liable on all charges; sentencing is going to take place in September 2006.^[70] Maximum sentence estimates range from 45 to165 years.^[71] Thousands of Enron employees lost their jobs and pensions and shareholders lost their investments when Enron declared bankruptcy in December 2001.^[72]

After the Enron scandal had become public in 2001 regulatory moves appeared to languish in early 2002.^[73] However, in June 2002, WorldCom, America’s second largest long distance telecommunication company, announced that it has had overstated earnings by US $3.8 billion in the previous year.^[74] Investigations proved that WorldCom executives had counterfeited the company’s books through bogus entries inflating revenues this way.^[75] The company’s market capitalisation dropped considerably from US $115 billion to less than US $1 billion.^[76] Shareholders lost two thirds of their investments in stock value.^[77]

As a result of this second major accounting scandal within one year, the US Congress felt obligated to pass SOX on 30 July 2002.^[78] US President George W Bush described the law as “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt”.^[79] The regulations were intended to hold affiliates in monitoring positions liable to execute their duties properly.^[80] The intention of SOX, as set down in its preamble, is “to protect by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws, and for other purposes”.^[81] The US securities market suffered severely from recent scandals. Patrick McGeehan, CEO of Goldman Sachs, for example, described the post-Enron era as “a time when business has never been held in less repute”.^[82] Consequently, SOX might be seen as an attempt of the US legislature to satisfy the desires of startled investors for strict regulation and to improve the overall confidence in the US securities market.^[83]

C. Causes of the Market Failure

1. Introduction

According to Ribstein there are three reasons for the 2001/02 market failures. He describes them as agency costs, a “bubble atmosphere”, and a gatekeeper failure.^[84] This subsection explains these terms and their severe effect on the US securities market which made Enron and WorldCom inevitable.

2. Agency Costs

The separation of ownership and control leads to so-called “agency costs”.^[85] Corporate managers function as agents of the shareholders who own the company.^[86] The main benefit of having non-owner managers is that passive owners are able to invest in diversified portfolios, leaving the risk of failure to the specific agent.^[87] These agents have, as Ribstein observes, “incentives to use their control [over the company] to benefit themselves rather than the owners”.^[88] Costs arising from supervising management and protecting owners as well as residual losses caused thereby are called “agency costs”.^[89] Since ownership is highly dispersed in most securities markets, the monitoring process is particularly impractical in listed public companies raising agency costs substantially.^[90] These costs are exacerbated by the “free-rider” mentality of minor shareholders who are either unwilling or unable to invest money and time in monitoring management.^[91] The Enron as well as the WorldCom case show indubitably the dilemma that may arise when owners put too much trust in their agents and lose their natural scepticism. Large-scale managerial fraud paired with an indistinguishable cleverness of masking such misdeeds made effective supervision difficult, if not impossible.^[92] Fostered by the size and complexity of the business, agency costs rose to an unbearable degree. The nature of agency costs disallows constant and thorough supervision in such an environment.

3. Bubble Atmosphere

The mood prevalent in the securities market after Enron and WorldCom may be described as ‘panic’, a panic that derived from absolute disillusionment.^[93] Investors had lost their healthy scepticism for the “new market”.^[94] A sheer abundance of business opportunities and deregulations of numerous industries paired with seemingly inexhaustible amounts of capital resulting from an increasing number of private investors entering the securities market led to an unrealistic optimism shared by all market participants.^[95] Investors had gotten used to believing stories about expected yet unrealistic earnings.^[96]

Moreover, a “new breed of corporate managers” found themselves in a new, highly-competitive market, in which only the most confident and deceptive participants could survive.^[97] It might be assumed that high market expectations and tough competition spurred managers to fraudulent actions. Investors continuously expected news of even higher earnings and there was always someone as competent as oneself waiting to replace the CEO. There were also new business techniques, such as Enron’s SPEs, which made financial statements opaque.^[98] In particular small-scale investors, but also some institutional investors, lacked the expertise to understand the company’s accounts and its actual financial status.^[99] Consequently, many executives disregarded all ethical measures of the ‘old economy’ and enriched themselves on the way up and lied in order to cover up their crimes on the way down.^[100]

Ribstein regards these corporate frauds as a logical consequence of the stock-market boom of the 1980s and 1990s. He states that every economic boom is followed by a crash and strict regulations.^[101] Certain groups within society including well-established corporations as well as numerous forms of legal advisers favour harsh regulation whereas marginal firms and start-ups might be infringed by regulatory attempts.^[102] During a phase of economic boom, equilibrium between these interest groups prevails because “those who might shift the balance, such as consumers or investors, do not see a need for new regulation while they are riding a rising market”.^[103] In case of an economic crash, this equilibrium shifts in favour of those preferring stricter regulations for its negative effect on weaker market participants.^[104] Ribstein calls this the “Cycle of Financial Regulation” and claims that this has also happened after the 1929 crash of the New York Stock Market with the so-called New Deal.^[105] In sum, a market thrives and expands in such a way that investors lose their scepticism and start to believe lies about inexhaustible earnings. All market participants find themselves in a euphoric state that is based on unrealistic optimism. This “bubble”^[106] atmosphere expands until it bursts.

During its expansion, it has provided a situation in which fraud could easily flourish.^[107] Nonetheless, Ribstein claims, it is not the discovery of such frauds which cause a decline in the stock market.^[108] Statistics of the New York Stock Exchange prove, as he says, that stock values were already decreasing in 2001 and that the phase of economic boom had already ceased.^[109] Scandals such as Enron and WorldCom merely coincided with this phase.^[110] Managers had gotten too greedy and made mistakes while trying to cover up their previous crimes as they realised that their company’s bad financial situation became increasingly apparent. Investor expectations were built on lies which had become too extensive to hide. Securities prices cannot rise indefinitely and too much market optimism results in uncontrollable managerial conduct.^[111] Accordingly, a boom phase necessarily leads to a phase of strict regulation, such as the one taking place in the USA at present, as investors lose confidence in the market and governments need to react. All market participants have by then reverted from extreme optimism of the bubble atmosphere to extreme pessimism.^[112]

4. Gatekeeper Failure

Shareholders are, due to the high diversity of ownership, unable to monitor management themselves. Therefore, they delegate such tasks to the directors, auditors and other supervisors, often referred to as “gatekeepers”.^[113] At Enron, gatekeepers were oblivious to the scandals within the company although evidence of the manipulations that took place would have been available to sophisticated supervising bodies.^[114] As Ribstein analyses that gatekeepers are either “too remote from the misconduct to be able to spot it” or “conflicting loyalties [makes them] overlook … misconduct”.^[115]

The example of Arthur Anderson LLP, formerly considered to be one of the ‘Big Five’ international accounting firms, shows this inadequacy. In highly competitive markets with an increasing number of auditing firms, supervising bodies were willing to sacrifice ethics and even valuable reputation for the sake of business relationships and profit maximisation within the firm.^[116] Arthur Anderson was the auditor of Enron and WorldCom. It was convicted of obstruction of justice for destroying Enron-related documents.^[117] In this case, the auditor not only overlooked misconduct but also assisted it. It is unclear, if Arthur Anderson personal was aware of the fraudulent behaviour of WorldCom executives, as well. Nonetheless, in the bubble atmosphere fraud prospered because auditors were either unwilling to spot misconduct or they were caught up in this surge of optimism just as anyone else and therefore unable to apprehend complex concealments. Anyway, even gatekeeper failures may be seen, in the author’s perspective, as a result of the economic boom phase and people’s irrevocable belief in an unstoppable market growth.

[...]

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^[1] Securities Commission, About: Who We Are, <http://www.sec-com.govt.nz/about/> at 05 July 2006.

^[2] Berle A & Means G, The Modern Corporation and Private Property (1932).

^[3] Smith A, An Inquiry Into The Nature And Causes Of The Wealth Of Nations (Glasgow ed, 1976).

^[4] Ribstein L, SARBOX: The Road to Nirvana, 2004 Mich. St. L. Rev. 279, 280.

^[5] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.

^[6] Securities Commission, Corporate Governance in New Zealand: Principles and Guidelines – A Handbook for Directors, Executives, and Advisers, <http://www.sec-com-gov.nz>, at 18 June 2006, p 28.

^[7] Farrar J, Enforcement: A Trans-Tasman Comparison, Corporate Governance at the Cross Roads (14 February 2005), p 10.

^[8] Farrar, above n 7, 10 & 11.

^[9] Gilberton B & Brown A, Corporate governance in New Zealand, <http://www.iflr.com>, at 18 June 2006, p 51.

^[10] Ibid.

^[11] Ministry of Economic Development, Small & Medium Enterprises, <http://www.med.govt.nz/templates/MultipageDocumentPage_202149spx#P47_5065> at 05 July 2006.

^[12] Companies being defined as artificial legal entities with separate legal personality (Walker G, Reid T, Hanrahan P, Ramsay I & Stapledon G, commercial applications of company law in new zealand, p 5 [§103]).

^[13] Ibid, p 18 (§113).

^[14] Ibid.

^[15] Ibid, p 16 (§113).

^[16] Ibid.

^[17] Ibid, P 7 (§105).

^[18] Ibid, p 8 (§105); NZSE, Share Ownership Survey 2000, (2000).

^[19] Krackhardt O, New Rules for Corporate Governance in the United States and Germany – A Model for New Zealand?, 36 VUWLR 319, 327.

^[20] Fox M & Walker G, Evidence on the Corporate Governance of New Zealand Listed Companies, 8 Otago L. R. 317, 327-328.

^[21] Krackhardt, above n 19, 329.

^[22] McKinsey and Company, <http://www.mckinsey.com>, at 15 June 2006.

^[23] Securities Commission, Corporate Governance in New Zealand – Consultation on Issues and Principles (September 2003), < http://www.ecgi.org/codes/documents/cg_nz_consult2003.pdf>, at 18 June 2006, p 3.

^[24] Krackhardt, above n 19, 329.

^[25] New Zealand Stock Exchange, Annual Report 2001.

^[26] Krackhardt, above n 19, 329.

^[27] Securities Commission, above n 23, 3.

^[28] Krackhardt states also that “the small size of an economy does not prevent its producing internationally successful large companies” (Krackhardt, above n 19, 327).

^[29] Securities Commission, Corporate Governance in New Zealand: Principles and Guidelines, <http://www.sec-com-gov.nz>, at 18 June 2006, 1.

^[30] Securities Commission, above n 23, 3.

^[31] Krackhardt, above n 19, 330.

^[32] Securities Commission, above n 23, 8.

^[33] Ibid.

^[34] Ibid.

^[35] Ibid, 4.

^[36] Ibid, 3.

^[37] Securiteis Commission, above n 6, 5.

^[38] Securities Commission, above n 6, 28; Diplock rejects the “comply-or-explain” enforcement vehicle, which makes disclosure mandatory (Diplock J, Corporate Governance: The Role of the Regulator, Legal Research Foundation Conference 2005, (18.02.2005), p 6).

^[39] Panckhurst R, Guiding Rules For Directors Sit Well (20 February 2004), The New Zealand Herald Auckland, at C3.

^[40] Diplock, above n 38, 7; Securities Commission, above n 6, 4.

^[41] Securities Commission, ibid, 5.

^[42] Ibid; Diplock, above n 38, 6 [emphasis added].

^[43] Ibid, 7.

^[44] Ibid.

^[45] Krackhardt, above n 19, 333.

^[46] Ibid.

^[47] Securities Commission, above n 6, 9.

^[48] New Zealand Stock Exchange, NZX Corporate Governance Best Practice Code (August 2003), <http://www.nzx.com> at 18 June 2006, p 3.

^[49] Thereby making double-reporting unnecessary (Securities Commission, above n 61, 8).

^[50] See Securities Commission, above n 6, 6.

^[51] Ibid, 8.

^[52] Ibid.

^[53] Ibid; NZX Listing Rule 10.5.3(i) [emphasis added].

^[54] Diplock, above n 38, 8; it needs mentioning that they are not required by law to use this format either.

^[55] Krackhardt, above n 19, 331.

^[56] Ibid.

^[57] Kim B, Sarbanes-Oxley Act, 40 Harv. J. Legis. 235, 252.

^[58] Lehman K, Executive Compensation Following the Sarbanes-Oxley Act of 2002, 18 NCLR 2115, 2117.

^[59] Branson D, Enron – When All Systems Fail: Creative Destruction or Roadmap to Corporate Governance Reform?, 48 Vill. L. Rev. 989.

^[60] Berle and Means first asked for federal legislation on securities law in 1932 (see Ribstein L, Bubble Laws, 40 Hous. L. Rev. 77, 87).

^[61] Kim, above n 57, 236.

^[62] Hamilton R, The Crisis in Corporate Governance: 2002 Style, 40 Hous. L. Rev. 1, 46.

^[63] Ruder D, Lessons from Enron: Director and Lawyer Monitoring Responsibilities (2002),

(< http://www.law.northwestern.edu/contexec/documents/Ruder_Lessons_Enron.pdf> at 10 April 2006).

^[64] Wikipedia, Enron Corporation, <http://en.wikipedia.org/wiki/Enron_Corporation> at 07 April 2006.

^[65] Limited partnerships controlled by the Enron Corporation.

^[66] Ruder, above n 63.

^[67] Ribstein, above n 60, 84.

^[68] Ibid [emphasis added].

^[69] Wikipedia, above n 64.

^[70] RAW Story, Enron jury reaches a verdict in fraud and conspiracy case, <http://www.rawstory.com/news/2006/Enron_jury_reaches_verdict_in_fraud_0525.html> at 29 May 2006.

^[71] Ibid.

^[72] Wikipedia, above n 64.

^[73] Ribstein, above n 60, 86.

^[74] Owen C, Board Games: Germany’s Monopoly on the Two-Tier-System of Corporate Governance and Why the Post-Enron United States Would Benefit From Its Adoption, 22 Penn St. Int’l L . Rev. 169.

^[75] Wikipedia, MCI, <http://en.wikipedia.org/wiki/WorldCom> at 07 April 2006).

^[76] Owen, above n 74, 169.

^[77] Wikipedia, above n 75.

^[78] Ribstein, above n 60, 86.

^[79] US Gov’t, Remarks on Signing the Sarbanes-Oxley Act of 2002, 38 Weekly Comp. Pres. Doc. 1284 (30 July 2002), < http://www.whitehouse.gov/news/releases/2002/07/20020730-1.html> at 29 May 2006.

^[80] Ibid.

^[81] Ibid.

^[82] McGeehan P, Goldman Chief Urges Reforms in Corporations, N.Y. Times, 6 June 2002 quoted in Owen, above n 74, ftn 9.

^[83] Kim, above n 57, 236.

^[84] Ribstein, above n 4, 280.

^[85] Ibid; see Jensen M & Meckling W, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305, 308 (definging agency costs).

^[86] Beck A & Borrowdale A, Guidebook to New Zealand – Companies and Securities Law, (7th ed.), p 90, §407, §408.

^[87] Ribstein L, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. Corp. L. 1, 36.

^[88] Ibid..

^[89] Ibid.

^[90] Ribstein, above n 4, 280.

^[91] Ribstein L, Sizing Up SOX, Legal Research Foundation – Seminar Corporate Governance At The Crossroads (18 January 2005), p 4.

^[92] Ribstein, above n 4, 281.

^[93] Ribstein remarks that Congress hurriedly passed SOX (Ribstein, above n 4, 282 [emphasis added]).

^[94] Ribstein, above n 87, 10.

^[95] Ribstein, above n 60, 83, 84.

^[96] Ibid, 85.

^[97] Ribstein, above n 87, 9.

^[98] Ribstein, above n 4, 281.

^[99] See references in Ribstein, above n 4, ftn 10.

^[100] Ribstein, above n 87, 9.

^[101] Ribstein, above n 60, 78; see also Coffee J, Rise of Dispersed Ownership, 111 Yale L. J. 1, 66 (calling it the “crash-then-law” cycle.

^[102] Ibid, 79.

^[103] Ibid.

^[104] Ibid.

^[105] Ibid, 79 & 90; see APPENDIX A for graph of the 1929 crash.

^[106] When Ribstein talks about the “bubble atmosphere”, he actually refers to an Act passed after the Spanish War, which intended to secure royal rights by regulating speculations and is now known as the Bubble Act derived from the economic term “speculative bubble” (see Ribstein, above n 60, 95 & 96). In the author’s opinion, the term bubble can also be understood metaphorically, picturing a market which expands, similar to a balloon or bubble, until it succumbs to inherent pressures and its fragile construction and bursts (see Wikipedia, Economic Bubble, <http://www.en.wikipedia.org/wiki/Economic_bubbles> at 30 June 2006).

^[107] Ribstein, above n 4, 281.

^[108] Ribstein, above n 60, 86.

^[109] See Ibid, ftn 39; Coffee, above n 101, 19.

^[110] Ibid.

^[111] Ibid, 77 & 81.

^[112] Ribstein, above n 87, 49.

^[113] Kraakman R, Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy, 2 J. L. Econ. & Org. 53, 61.

^[114] Report of the Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp., February 1, 2002, <http://news.findlaw.com/hdocs/docs/enron/sicreport/> at 10 April 2006, p 23 ; Catanach A & Rhoades-Catanach S, Enron: A Financial Reporting Failure?, 48 Vill. L. Rev. 1057.

^[115] Ribstein, above n 91, 4.

^[116] Bazerman M, The Impossibility of Auditor Independence, Sloan Mgmt Rev. 88, 91.

^[117] Gutman H, Dishonesty, Greed and Hypocrisy on Corporate America (14 July 2002), <http://www.commondreams.org/views02/0712-02.htm> at 30 May 2006.