SCOTT HARSHBARGER
‘A good first step’

It’s been one year since the Sarbanes-Oxley Act of 2002 was made official regulation for businesses, but for banking and financial institutions, the act remains simply a friendly reminder about corporate governance.

Because of numerous other regulations pertaining to, and the regulators that oversee, bank compliance, banking officials in the Bay State said Sarbanes-Oxley was helpful in establishing additional guidelines but they are not going to change existing rules as a result of the act.

“In many ways, all of the banks in Massachusetts were under very similar Sarbanes-Oxley type regulations, so [the act] has been confusing because it provides a certain redundancy of things that are already happening,” said Daniel J. Forte, president of the Massachusetts Bankers Association. “Certain sections of this law were needed, but other sections were more severe. Compound that with the fact that banks have already been under their own set of regulations, and this becomes another regulatory issue.”

Sarbanes-Oxley was created after the fallout from the Enron Corp. and accounting problems reported by other corporations. The act, which took effect on July 30, 2002, imposed new duties on public companies and their executives, directors, accountants, auditors and analysts. It set new standards for auditor independence and its purpose was to restore trust in the integrity of the disclosure and accounting practices.

While many banks are not considered “public companies,” bank boards are made up of independent auditors and audit committees, which made Sarbanes-Oxley guidelines relevant to bank management.

Scott Harshbarger, former attorney general of Massachusetts and currently head of the corporate governance division for Boston-based law firm Murphy, Hesse, Toomey & Lehane, said unlike most businesses, banks did not react to Sarbanes-Oxley with much thought.

“It’s one year into Sarbanes-Oxley and for many industries, this was a new regulation, but for other industries like banking, who were used to being regulated, having Sarbanes-Oxley was the new regulatory scheme,” said Harshbarger. “Bankers’ and financial services professionals’… reaction is that Sarbanes-Oxley doesn’t apply directly to them. On the one hand, the hope is that [bankers] can see this as an opportunity and institute accountability and independence without manager’s micromanaging the board [of directors]. On the other hand, internal controls need to be in place and we need to make sure the rules are implemented.”

‘The Opening Stage’

However, cost is a factor for implementing new regulations because of technology and outside consulting, and banks are faced with pressure to enhance their customer service options to retain consumer confidence lost during the previous accounting scandals.

“I don’t think there is anyone that doesn’t believe there hasn’t been a significant amount of investor loss of confidence. It may be perception as opposed to reality, but there has been some loss of trust and confidence,” said Harshbarger. “But, people still have great faith that the system can remedy itself.”

But Harshbarger said his concern was whether bank boards are taking Sarbanes-Oxley seriously.

“My concern is whether all the boards are getting the message … are boards really going through the process of making sure they are independent and looking at board evaluation processes … and also getting independent assessments? Are they being independent, and do they realize the rules apply to them?” said Harshbarger.

But Forte said banks have enough regulations with which to comply, and Sarbanes-Oxley should identify appropriate corporate governance examinations for bank boards but not change the relationship between board member and bank manager.

“Sarbanes-Oxley should not be changing the relationships of the board of directors with bank management. There were consultants early on [who] said directors should have meetings without the CEO, but that’s ridiculous,” said Forte. “You can’t have meetings without the CEO there. It should be a rare occurrence where boards are meeting without CEOs. But it’s a complicating factor because of all the other regulations in place … a certain amount of empathy should be had for board members.”

However, Harshbarger reminds industry officials that the purpose of Sarbanes-Oxley is to restore the confidence of investors, regardless of the cost, and bankers should realize they can help solve the confidence crisis.

“While Sarbanes-Oxley may not be perfect, it is designed to try to restore investor confidence. Many investors obviously lost huge amounts of money and, let’s not kid ourselves, companies played fast and loose on this and those [that] lost were the ones who played by the rules. While Sarbanes-Oxley has not fully restored investor confidence and has not been adopted wholeheartedly, it’s a good first step,” said Harshbarger. “Bankers, in particular, who felt they weren’t part of the problem, realize they can be part of the solution. They should step up now and do that – the most important thing is to have leaders of these industries set the guidelines. It’s the only way to effectively change the culture. It’s never going to come from law or law enforcement alone.”

Forte noted that while the acceptance and implementation of new laws are inevitable, current regulations should not be overlooked or neglected.

“The only moving target will be to ensure that the banking regulators do not create a new layer of already-existing regulations that are already in place,” said Forte.

Still, after one year, Sarbanes-Oxley remains imbedded in the minds of all business executives, including bankers, and industry professionals agree that doing business in good faith will help investor confidence.

“It’s very important that while we incorporate appropriate common sense changes in governance and leadership in these major leading-edge industries and that we not ‘chill’ the entrepreneurial spirit – we can make mistakes, but the test is whether it is an isolated incident or an incident of the system,” said Harshbarger. “We’re just at the opening stage … how this evolves and plays out over time you can anticipate, but there is a real opportunity for bankers and financial services leaders to [advance]. [Banking is] the leading industry and [bankers] are the leaders in governance as well. We can demonstrate that it absolutely possible to do good by doing right.”