The United States corporate governance system must seem to be in terrible shape. Top executive compensation is also routinely criticized as excessive by the press, academics, and even top Federal Reserve officials. These failures and concerns in turn have served as catalysts for legislative change— in the form of the Sarbanes-Oxley Act of 2002(SOX) — and regulatory change, including new governance guidelines from the NYSE and NASDAQ.
The move toward shareholder value and increased capital market influence has also been apparent in the way corporations have reorganized themselves. For example, there has been a broad trend toward decentralization. Large companies have been working hard to become more nimble and to find ways to offer employees higher-powered incentives. At the same time, external capital markets have taken on a larger role in capital reallocation, as evidenced by the large volume of mergers and divestitures throughout the '90s. The corporate governance structures in place before the 1980s gave the managers of large public U.S. corporations little reason to make shareholder interests their primary focus. Since the mid-1980s, the American style of corporate governance has reinvented itself and the rest of the world seems to be following the U.S. lead.
Technological advancements, an increase in the number of business failures and the widely publicized corporate scandals which have rocked the nation's confidence have forced companies to place more emphasis on internal control systems and audits. Section 404 of the Sarbanes Oxley Act requires public companies to include a report about the effectiveness of controls in their annual form 10-k. Internal controls consist of procedures used by management to ensure accuracy and reliability in performing certain business functions such as financial reporting. Furthermore, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines internal control as... [continues]
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