Is Silicon Valley strangled by SOX?

Jim Clark's exit from the board at Shutterfly raises questions about running start-ups in the shadow of Sarbanes-Oxley.

The Sarbanes-Oxley Act might be meant to guard against massive white-collar scandals, but the resignation of a high-profile tech veteran suggests the law may also be restricting efficiency atop Silicon Valley's corporate ladder.

Earlier this month, venture capitalist and Netscape founder Jim Clark announced his departure from the board of directors at photo-printing site Shutterfly, where he served as chairman. In his resignation letter, he cited "the constraints imposed by Sarbanes-Oxley on (his) having any significant role on the board" as one of the primary reasons for departure.

It appears that Clark felt Sarbanes-Oxley--commonly known as SOX--had built an insurmountable wall between his status as a major shareholder and investor at Shutterfly, and his role on the board of directors.

"(Sarbanes-Oxley) dictates that I not Chair any committee due to the size of my holdings, not be on the compensation committee because of the loan I once made to the company, (and) not be on the governance committee," he continued in his resignation letter. "It even dictates that some other board member must carry out the perfunctory duties of the Chairman."

In a place like Silicon Valley, renowned for its entrepreneurial spirit and saturated with start-ups that might be the next Google or eBay, a heavy reliance on venture capital means that the line between investor and director is often blurred. SOX's internal controls, therefore, can completely change the corporate dynamic, and Clark's resignation brought to light the possibility that the tech industry may see more resignations like this one.

"Jim Clark is not atypical and not unique," said Steven Kaplan, a professor of entrepreneurship and finance at the University of Chicago's Graduate School of Business. "I have friends who've said they won't go on public (companies') boards," he added, noting that venture capitalists like Clark are often the quickest to bolt from their posts.

Jim Clark Jim Clark

Clark declined to further comment on the matter.

Executives and board members have thought of Sarbanes-Oxley as a nuisance, sometimes humorously, since its inception. The law, enacted in July 2002 in the wake of the and WorldCom fiascos, requires better monitoring of auditing and accounting practices and improved boardroom transparency to ensure that a corporate crisis on the scale of Enron's could never take place again.

On the positive side, many shareholders have had their Enron nightmares assuaged; but on the negative side, the governing bodies of public companies have claimed that SOX makes it tough for them to get their jobs done. Most often, they cite the high costs of instituting the infrastructure needed to comply with the act's requirements as well as constraints on how much power can be held by boards of directors and C-level executives. It's a complaint that's heard from just about every kind of public company, but in Silicon Valley, the impact of SOX can be stronger.

An incentive to stay private?
Take the case of veteran investor Tim Draper, whose firm Draper Fisher Jurvetson has a foot in the door at some of tech's biggest recent success stories--Skype, for example, and Chinese search engine Baidu. Openly opposed to SOX, Draper cited the legislation as the reason he dropped off multiple public boards--much like Jim Clark.

Tim Draper Tim Draper

"Public boards before SOX were generally tolerable because the team could talk about R&D, and marketing and finance and sales, before the lawyers and accountants took over," he said in an e-mail. "Sarbanes-Oxley was a knee-jerk reaction to Enron, and the repercussions are far more disastrous than Enron was."

Some may find Draper's views on SOX extreme, but he's certainly not alone in his opinion. Restrictions on public companies' activity can be so stringent for an entrepreneurial culture like Silicon Valley's that some tech insiders think that the average company is better off not going public in the first place.

"Clearly being public today is a greater burden on younger companies and their executives, so it's probably better for everyone that these companies stay private," said blogging entrepreneur Jason Calacanis, former head of Weblogs Inc. and current "Entrepreneur in Action" at investment firm Sequoia Capital. According to Calacanis, SOX doesn't even need to be factored into the equation. "The public really doesn't have the skill set and time to invest and track very young companies like angel investors, VCs and private equity folks do," he said.

"There is a culture in Silicon Valley among these high-tech companies, about how things should be done," observed Jay Lorsch, a professor of human relations at Harvard Business School. "They've done things a little differently than other companies over the years." And Lorsch, like the University of Chicago's Kaplan, admitted that SOX can be a pain for those in high places.

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