Professor Celia Moore, Jo-ellen Pozner and Aharon Mohliver. ImperiaBusiness School, Santa Clara University and London Business School. Published in Research in the Sociology of Organizations, 2022.
Problem
In 2002, the United States government passed the Sarbanes-Oxley Act, a landmark law designed to raise standards of corporate governance and make it harder for companies to hide financial misconduct. The assumption was that stricter rules would mean stricter accountability. But assumptions about how regulation works in practice are not always right.
Science
We studied what happened to CEO accountability after the Sarbanes-Oxley Act (SOX) came into force, focusing on how firms responded when they announced an earnings restatement, a public admission that their financial results had been wrong. Not all companies had to meet the law's toughest requirements. Smaller firms were temporarily exempt and that gave us a natural comparison group: firms that had to comply in full, and firms that did not.
Outcome
Firms that were required to meet all of SOX's provisions became 26% less likely to replace their CEO after announcing an earnings restatement. Firms that were exempt became 45% more likely to do so. The law designed to increase accountability had the opposite effect on the firms it applied to most strictly. Meeting the requirements of SOX appeared to certify firms as legitimate in the eyes of investors and boards, reducing the pressure on them to take further action when things went wrong.
Change
Out research revealed a mechanism that policymakers rarely account for: compliance with regulation can itself become a shield against accountability. Our findings have direct implications for how accountability frameworks are designed, particularly in financial services, where regulatory compliance is at times treated as a proxy for ethical behaviour.