Advisory Committee on Tax Exempt and Government Entities (ACT ...

The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesoccurrences in the future. 40 As noted previously, the current period of intense scrutinywith respect to governance relates back to Enron and other corporate scandals andCongress’ subsequent enactment of SOX. In fact, much of the discussion of “bestpractices” in the nonprofit sector since that time has focused on the extent to whichSOX-type reforms (sometimes broadened to include related changes to the exchangerules) should be adopted—or required—of nonprofit corporations. 41Professor Robert Clark of Harvard University, in a 2005 paper, 42 reviewed the empiricalstudies then to date involving publicly-traded corporations and their adoption of SOXtypegovernance measures, such as independent directors, section 404 internalcontrols, an independent audit committee, and restricting non-audit services provided bythe auditing firm, and concluded that “the search for strong empirical evidencesupporting a belief that key items in the recent wave of corporate governance changeswill have a major positive impact is generally disappointing.” 43 He also examined thespecific “good governance practices” advocated by the rating agencies, such as asupermajority of independent directors, a relatively small board size, a separate (i.e.,independent, non-CEO) board chairman, a specified number and length of meetings,regular executive sessions (at which company officers are not present), regularevaluations of the CEO, regular self-evaluations of the board, minimum stock ownershiprequirements for directors, and limits on director tenure (term limits and/or retirementages). Citing a plethora of studies examining these and similar “good practices,”Professor Clark concluded: “For most of these practices, the empirical evidence bearingon their correlation with shareholder value is limited or mixed or both, and does notprove decisively that they cause increases in value.” 44In some sense, this is not surprising. For example, on paper, Enron had in place arigorous conflict of interest policy and other controls. The problems at Enron related toimplementation, including the board not demanding or ensuring it understood thepertinent information, the board waiving conflicts that should not have been waived, andthe board not responding appropriately once problems began to emerge. 45 Anecdotal40See Appendix 2 for a discussion of for-profit corporate governance. The enactment of groundbreaking federal securities lawsoften was prompted by profound failure or crisis.41See, e.g., Paul D. Brode & Richard L. Prebil, The Impact of Sarbanes-Oxley on Private & Nonprofit Companies (National DirectorsInstitute 2005); Carl Oxholm III, Sarbanes-Oxley in Higher Education: Bringing Corporate America’s “Best Practices” to Academia,31 J.C. & U.L. 351 (2005); Moody’s Investor Services, Governance of Not-for-Profit Healthcare Organization (2005); Fitch Ratings,Sarbanes-Oxley and Not-For-Profit Hospitals: Increased Transparency and Improved Accountability (2005); Standard & Poor’s,Under Legislative Scrutiny, The U.S. Nonprofit Sector Embraces Corporate-Style Oversight (2005) and “Research: U.S. Not-for-Profit Health Care Sector Explores the Benefits of Sarbanes-Oxley Compliance (2005). See also ABA Coordinating <strong>Committee</strong> onNonprofit Governance, supra note 16.42Robert Charles Clark, Corporate Governance Changes in the Wake of the Sarbanes-Oxley Act: A Morality Tale for PolicymakersToo, 22 Ga. St. U.L. Rev. 251 (2005). See also Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack CorporateGovernance, 114 Yale L.J. 1521 (2005).43Clark, supra note 43, at 308. The one exception involved disclosure, which he found to be positively correlated with reducing thevolatility of stocks. Id. at 304-05.44Id. at 303.45See William Powers, Jr., Chairman of the Special Investigation <strong>Committee</strong>, Report of Investigation by the Special Investigative<strong>Committee</strong> of the Board of Directors of Enron Corp. (Feb. 1, 2002), at 148:ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 16