The Sarbanes-Oxley Act was implemented in 2002 for the improvement of the finical sector through the reinforcement of checks and balances. There were questions regarding the accounting standards. According to the Act, many changes had to be made in the financial reporting and companies had to be analyzed. Much of the corporate governance has been directed to the financial reporting and financial engineering is one of the areas that have received much of the corporate governance attention since the Sarbanes-Oxley Act (Bies 2002).
Since then, the issue of auditor’s independence has been on the front line in regards to corporate governance. There has been a growth in the number of organizations which has been brought about by the discouragement of external investors. These organizations have employed innovative financing techniques which are difficult to be understood by external investors (Hoogervorst 2009:167). Corporations have introduced risk-management tools which have replaced the ancients accounting standards. This has made it possible for the discloser firm’s positions in terms of risk management and the strategies they use for public transparency.
Most of the creditors have embraced financial innovation and transparency which lays a basis for corporate governance (CCH Editorial 2008:144). In the Sarbanes-Oxley Act, issues were raised to provide corporate governance in private companies. Much has not been done in these companies because of the concentration on public companies. For the last ten years investors have been on the increase with an increase in the number of shareholders thus requiring more concentration from corporate governance.
This is because the board of directors has been facilitating the corporate collapse. To curb this, corporate governance required directors to be elected by majority voting. This is not a common practice in most states but was initiated after the Act. Corporate governance does not allow a small number of the shareholders to vote, it requires plurality shareholders. As a response to these, most of the large companies have already amended their articles of incorporation to include majority voting for directors (Reuters 2008).
Another issue that has been emphasized in the corporate governance area for the public companies is the abandonment of practices that entrenches directors or current management. An example of such practices is the “poison pill” which was adopted by many companies in the period 1980-1990 (De Vay 2006: 102). This practice required that, if an individual acquired stocks more than the minimum shareholders stock without having the approval from the board, then the shareholders under the poison pill would be permitted to buy shares in huge amounts at a nominal per-share value. This was abolished through corporate governance.
Before the act was enacted, directors were elected for a period of three years in most companies but since then, the corporate governance area requires directed to be elected on an annually and provides the provision for removing directors if they fail to deliver (Reuters 2008). Another issue that has been tackled by corporate governance is director independence. Majority of the directors are required to be independent and in line with this most of the companies have gone ahead to put more stern standards for their board of directors which stipulates that more than 75% of the directors should be independent.
Most of the directors and officers are required to hold a certain percentage of their shares for the long term This has replaced the options which they previously had whereby they could dispose off their shares at will (Northrup 2006: 211). The issues required by corporate governance are complicated and costly for many companies and it remains a challenge (Kohn, Kohn & Colapinto 2004:50). With the current credit crisis, it is obvious that the financial institutions will continually be scrutinizing for them to be in line with what the corporate governance stipulates.