In recent years, as corporate scandal after corporate scandal has unfolded, there have been more and more calls for improved corporate governance. These came from all corners -- even from your friends at the Fool, where we've been calling for a crackdown on conflicts of interests for a long time. (Check out our Motley Fool Manifesto.)
The government weighed in, too, with the 2002 Sarbanes-Oxley Act (referred to as "Sarbox" by those in the know). One of the things the Sarbanes-Oxley Act did was make it easier to rid corporate boards inept (or worse) directors. Before Sarbox, directors could be barred only as part of settlements, or after being found guilty of securities law violations at a trial and being barred by a federal judge. As you might imagine, relatively few people were ever banned under such a system.
Now, however, the Securities & Exchange Commission (SEC) has the power to bar directors on its own, following a brisker internal process. In addition, the SEC now only has to demonstrate that the person is "unfit" to be an officer or director, rather than "substantially unfit." According to Stephen Hibbard, a securities law expert, "Unfit can now be defined as someone who isn't doing the job well, as opposed to doing the job wrong."
According to a CFO.com article, "Last year, the SEC requested 170 bars, which prohibit individuals from holding a position as an officer or director of a publicly traded company. That's up from 126 bars in 2002, and only 51 in 2001-a threefold increase over two years." For this, Fools should be thankful. But there's a problem: enforcement.
Once someone is barred, how can the SEC ensure that they don't continue to serve on one or more boards? Mainly by monitoring, which is costly. The SEC reports that it performs spot checks, but it notes that it expects companies to bear the responsibility of ensuring that they don't employ barred individuals.
You can learn more about corporate reform progress at the Sarbanes-Oxley Act website and the SEC website. In the meantime, keep your nose clean if you want to remain on that board of directors!
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
