The Political Economy of Corporate Financial Regulatory Legislation

Every few years over the last several decades, Congress has been faced with the question of how to best regulate corporate financial activities. In the late 1970’s, concern for bribery overseas by American businesses led to passage of the Foreign Corrupt Practices Act (FCPA). In the early 2000’s, concern over misreporting of financial activities led to passage of the Sarbanes-Oxley Act (SOX). In both of these laws, corporations are required to follow new rules and regulations relating to financial reporting and disclosure.

How influential were business interests in shaping the passage of these two laws, and what lessons can we learn from the legislative history to inform future debates over corporate financial regulatory legislation? My article, forthcoming in the John Marshall Law Review and currently available in draft form on SSRN, attempts to lay a groundwork for understanding how various interest groups — businesses and industries — may influence corporate regulatory legislation.

By examining the legislative history in both the House and Senate during the debate over both the FCPA and SOX, we can see what groups were active and interested in the legislation, and how they presented their case to lawmakers. Using Richard Posner’s theory of interest groups in his foundational law and economics piece, Theories of Economic Regulation, the article evaluates the impact of business special interest groups in shaping the legislation. The legislative history indicates that, at least as a general matter, the business “interest” was relatively weakened by political forces and lack of strong coordination and common interest.

Despite common misperceptions about the strength of business interests in lobbying, the reality is that different industries and firms have different interests. Organising those interests into a coherent, cohesive lobbying effort is substantially challenging, especially in the face of political pressures and events such as those surrounding the FCPA and SOX time periods. Sometimes, even the most powerful and wealthy cannot get everything they want. While my article does not discuss in depth the role of the “public interest” sentiment in securing passage of these laws, it is important to consider that the noble intentions of some may simply be furthering the goals of another group with less noble intentions; the Baptists and Bootlegger theory of regulatory politics could likely be applied to the passage of both the FCPA and SOX.

My article finds that one business interest — accounting — was a proponent of new rules and regulations and has remained supportive ever since passage of these laws. And no wonder: accountants, especially the big accounting firms, stood to benefit the most from new regulations and requirements for publicly-traded companies. While both laws have had a tremendous impact on businesses in terms of compliance and investigation, the accounting industry has derived a benefit from higher auditing fees, more arduous auditing needs, and economic concentration in its own industry.

It would be interesting to see what behind-the-scenes work pro-accounting forces played in the passage of these laws, such as campaign donations, advertisements, op-ed writing, and other forms of advocacy. Perhaps consistent with the Baptist and Bootlegger theory, they may have had all of their work done for them by the “Baptists”: the public interest groups in favor of tougher Wall Street regulation.

When a new corporate financial scandal arises in the future, it is important for policymakers to understand the unintended effects of legislation and to pause before rushing in to regulate corporate financial reporting. Even with the passage of Dodd-Frank, arguably the most expansive and stringent regulatory regime in American history, there are questions about who actually stands to benefit from new regulations. Do the big banks — able to afford the additional costs of compliance unlike their smaller competitors — really mind new regulations? Those newly employed in compliance positions, including accountants and lawyers, might have good reason to support new regulations too.

Much like FCPA and SOX, future regulations may benefit the institutions responsible for the “need to regulate” in the future. There will come a day when a new scandal emerges and some advocate for new laws and regulations to curb excesses. Hopefully, we will approach that situation smartly and calmly, and not rush to create new regulations without considering who the winners and losers might be.

(Originally posted on the Oxford Business Law Blog, available here).