You can probably guess that as a business ethics professional, I am in favor of improved corporate governance. There is plenty of evidence that corporate boards are not acting with initiative to advance the interests of the private shareholders who hold the trillions of dollars of value in publicly owned companies, and there are many structural reasons for this lacuna. But it would be a mistake to assume that I am automatically in favor of more corporate governance regulation. I have found much evidence that such regulation is often ineffective or even counterproductive. I first wrote about this in reference to CEOs sitting on the board - the norm in the US, where in the majority of large companies the CEO is actually chairperson of the board. As I pointed out, this is bad for corporate governance since the board is supposed to supervise management; the result is that the CEO is participating in, and even chairing, the very body supposed to be overseeing his activities. The problem is that oversight is not the only function of corporate boards; they are also supposed to map out strategy, which requires the expertise of insiders, and probably no one has as much expertise on the industry as the CEO. I cited some studies that showed no advantage to companies where the CEO is not on the board. The newest boomerang is the Sarbanes Oxley Act (the Sox of the title). In the wake of the Enron scandal and other episodes of genuine corporate mismanagement and genuine dysfunctional boards in the beginning of the decade, the US Congress passed a law that did two things: It increased the reporting requirement of public companies; and it increased the personal responsibility and liability of directors of these companies. I do not doubt that the law actually does increase the transparency of public companies as well as the vigilance of those individuals who sit on boards of public companies. The problem is that the population of public companies is not static. The passage of Sarbanes Oxley corresponds precisely to a huge increase in the amount of capital going private. Thus, as some companies are moving, through the requirement of Sox, from mediocre to exemplary oversight, an increasing number of companies are moving from mediocre public oversight to virtually no public oversight as they are taken private. Here are the figures, taken from a Price Waterhouse Coopers analysis. In no year prior to 2002 did the total amount of capital taken private exceed $20 billion, and in 2002 the number was about $10b. Since then, the amount of capital going private has more than doubled each year (yes, more than a 100 percent increase annually), reaching $120b. in 2006. But companies going private are only part of the story - admittedly the biggest part. Forbes magazine reported that the flight from oversight takes two other forms: fewer private companies going public in the first place, and more companies choosing to list on overseas exchanges where they are exempt from US reporting requirements. Forbes also reported a dramatic increase in the number of CEOs on corporate boards. Busy CEOs can no longer afford the time and liability demanded to serve on the boards of other companies, so this irreplaceable source of expertise on corporate boards is being diluted. What this really means is that we are getting the worst of both worlds. Sarbanes Oxley thought it was trading off more governance for more expense. Companies would have to spend more in reporting requirements and board salaries (to compensate for additional duties and liability), but in return they would get better oversight. Of course there is always the question of cost effectiveness, but the basic idea is sound. However, there is evidence to suggest that what we actually got was less governance for more money. The possibility definitely exists that those companies that remain public are enjoying the benefits of increased oversight and board vigilance, and that this outweighs the cost of a few companies. The amount $120b. sounds like a lot, yet it is a modest fraction of the roughly $20 trillion value of publicly traded US companies. But the $120b. is an annual flow, and at that rate you could run down your $20t. pretty quickly. In addition, the figures on CEOs relate to the board members of currently publicly owned companies, suggesting that corporate boards are already facing a dilution of talent. The Sarbanes Oxley Act contains some well-thought-out provisions that would certainly tend to improve oversight for a given company and a given board. But the population of companies and boards is a moving target, and there is growing evidence that the static improvement is coming at a disturbing expense in the dynamic flight of capital and talent from the regulated sector. [email protected] The author is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.