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The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesthe Enron and WorldCom scandals that inspired SOX. Moreover, he notedthat the first-year costs of complying with the section 404 provisions, asestimated by the Financial Executives International survey, was nearly 50times greater than that originally estimated by the SEC ($60 vs. $1.2 billion);and the costs also were regressive, being not proportional to companysize. 175• Auditors’ Non-Audit Services. In a survey of 25 empirical studies on theissue of auditors providing non-audit services, Professor Robert Romanoreported that the overwhelming majority (19) found no negative impact andstated: “the conclusion that audit quality and auditor independence are notjeopardized by provision of non-audit services is supported not only by thegreat majority of studies, but by those that use the most sophisticatedtechniques and whose findings are most robust to different specifications oftheir models.” 176• Independent Directors. While there were a number of studies finding somepositive impact with independent directors, evidence from the first largescalelong-time horizon study of the relationships among boardindependence, board size and the long-term performance of large Americanfirms indicated that firms with more independent boards did not achieveimproved profitability. 177• Audit <strong>Committee</strong> Composition to Include Only Independent Directors.Professor Roberta Romano in a review of 16 studies involving auditcommittees reported that the majority, especially those studies using moresophisticated techniques, do not support the hypothesis that an auditcommittee composed only of independent directors will reduce theprobability of financial statement wrongdoing or otherwise improve corporateperformance. 178• Disclosure. One area where the empirical evidence did indicate acorrelation with positive effects for shareholders involves disclosure-relatedgovernance practices. None of the studies available at that time, however,considered the specific disclosure requirements mandated by SOX.Professor Clark cites, for example, a study examining the positive effect of175Id. at 291-95.176Id. at 295-97. See also Romano, supra note 43, at 1535-37. Professor Romano’s fine article also provides a thorough andcareful review of studies on independent audit committees, executive loans, and executive certification of financial statements, aswell as an analysis and critique of the legislative process leading to SOX. A less formal but wider overview of the empiricalevidence, which cites some intriguing additional studies, is given in Larry Ribstein, Sarbanes-Oxley after Three Years, (draft of June20, 2005), abstract and paper available at http://papers.ssrn.com/abstract_id=746884.177Id. at 298-302. See also Sanjai Bhagat & Bernard Black, The Non-Correlation Between Board Independence and Long-TermFirm Performance, 27 Iowa J. Corp. L. 231-72 (2002). In the nonprofit context, see Dana Brakman Reiser, Director Independencein the Independent Sector, 76 Fordham L. Rev. 795 (2007); Kathleen M. Boozang, “Does an Independent Board Improve NonprofitCorporate Governance?,” 75 Tenn. L. Rev. 83 (2007).178Id. at 302. See also Romano, supra note 43.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 82
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesthe 1964 extension of mandatory disclosure requirements to over-thecounter(“OTC”) stocks to a dramatic reduction in the volatility of thosestocks. 179Professor Clark also reviewed the specific “good governance practices” advocated bythe rating agencies, including:• a supermajority 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);• regular evaluations of the CEO;• regular self-evaluations of the board;• minimum stock ownership requirements for directors; and• limits on director tenure (term limits and/or retirement ages).Citing a plethora of studies examining these and similar “good practices,” ProfessorClark concluded: “For most of these practices, the empirical evidence bearing on theircorrelation with shareholder value is limited or mixed or both, and does not provedecisively that they cause increases in value.” 180In some sense, this is not surprising. For example, on paper, Enron had in place arigorous conflict of policy and other controls. The problems related to implementation,including the board not demanding or ensuring it understood the pertinent information,the board waiving conflicts that should not have been waived, and the board notresponding appropriately once problems began to emerge. 181 Anecdotal evidence suchas this may indicate that good governance in the end is a question of the values, activeengagement and accountability of those in charge, rather than the adoption of specificpractices or policies. *Even if empirical evidence suggested that certain “best practices” were “best” forbusiness corporations, it is not at all clear that this would translate to nonprofitcorporations. 182 The benchmark for success in these studies involving for-profit179Id. at 304-05. See also Allen Ferrell, Mandated Disclosure and Stock Returns: Evidence from the Over-the-Counter Market, OlinPaper No. 453 (2004), http://www.law.harvard.edu/programs/olin_center/corporate_governance. 180Id. at 303.181See supra note 46. 182See, e.g., Reiser, supra, note 47. ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 83
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