Warning that the corporate system can't work if boards of directors are hamstrung by fear of civil or criminal liability, Treasury Secretary John Snow this week called for balance in the enforcement of the Sarbanes-Oxley Act.

"We need to maintain balance in our enforcement. We need to make sure the emphasis is on substance and not form," Snow said in a speech this week on corporate governance at the New York University Center for Law and Business. "We need to make sure that innocent mistakes are not criminal."

Noting that, "We are still going through the learning process with Sarbanes-Oxley," Snow added, "No one can know the future, and no one is right about every business decision. But there is a crucial difference between approving a project that turns out to be a business failure, on the one hand, and 'cooking the books' to make a bad project look good, on the other. We must keep that fundamental distinction in mind. Misforecasting is not a criminal offense; misrepresenting the numbers is."

"Our corporate system cannot work if boards of directors are so afraid of civil or even criminal liability that they simply refuse to make the tough business decisions, if they become so risk averse that only business plans with no possible downside get approved," Snow warned.

"The board has always played the dual role of both providing direction to the corporation and making sure that management was performing properly. If we allow the system to be so skewed that all of the serious effort goes into oversight and second-guessing management, then the corporations will be hamstrung, legitimate business opportunities will be abandoned, and we will all suffer for it," he said.

Calling the American corporation "an extraordinary engine for economic development, innovation and change," Snow said that Sarbanes-Oxley was a "much-needed and timely tool for keeping that engine on track and running properly," but added, "We need to make sure it is not inadvertently applied in a way that cripples that engine."

Snow said that, "Considering the context in which it came about, Sarbanes-Oxley actually is in most respects quite a measured response," to the corporate scandals of 2002.

"The fact is it essentially reaffirms established norms and codes of corporate governance, albeit with criminal penalties," the Treasury secretary said, adding, "It reaffirms things that we had long taken to be the case -- that boards should oversee the corporation; that the audit committee should retain the outside auditors; that the nominating committee, not the CEO, should select the board members; and so on."

Calling Sarbanes-Oxley "essential legislation to hold the system together," Snow noted, "The scandals of 2002 did not occur in those great enterprises of America that had long exhibited a culture of ethical behavior." "Sarbanes-Oxley was an absolute necessity. It played the crucial rule of giving the public confidence that somebody was in charge, somebody was looking out for their interests and somebody would hold corporations accountable," he said. "But the subtlety of Sarbanes-Oxley is that it did all of this by reaffirming the basic rules of corporate governance, not by transforming them."

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