If you thought the Enron and WorldCom scandals were bad, hold on to your hat — and maybe your wallet — for the next round of corporate misdeeds.
The Sarbanes-Oxley Act will block the kinds of rascals who would prey on the unwitting institutional and small investor alike, right? I’m not so sure.
To illustrate my point, let’s look at the war on drugs. If you assume that the illegal drug trade operates much like any other market, then you have to conclude that the most efficient providers are the ones who reap the biggest rewards.
When law enforcement puts the squeeze on the dealers and makes it harder for them to get drugs to the street, prices go up. When prices rise, the incentive to deliver the goods goes up as well, and the willingness to take higher risks to get the drugs to customers increases.
With more to gain, it’s attractive to employ more sophisticated means to complete the distribution — better planes and methods of concealment and fatter payoffs to crooked law enforcement officials. If you make it harder for the dealers to get the drugs to their markets, you push out the inefficient operators and reward the efficient ones.
If you accept the premise that the fastest, strongest and smartest business people survive and flourish, you have to assume that the fastest, strongest and smartest white-collar crooks will find a way to beat just about every regulation thrown up to thwart their evil ways.
None of this is to say that we’re better off letting drugs come into the country unfettered or that we should allow business to go unregulated. It is to suggest, however, that it might be just as critical to pay attention to the demand side. In the case of drugs, that means figuring out how to take the profits out of the drug trade by means other than the counterproductive practice of interdiction.
In the legitimate business world, where the dishonest executive can wreak havoc on investors, shareholders need to demand answers when the company spouts public relations mumbo jumbo instead of straight explanations.
Sarbanes-Oxley has raised the bar for the crooks, and for those who have to watch them as well. Perhaps fewer corporate criminals will get through as a result, but the ones who do will be able to jump a lot higher.
