Has Sarbanes-Oxley and other regulation passed in the wake of corporate accounting scandals caused America's capital markets to lose their competitive edge in the global marketplace? That is a question about which a group of business and financial leaders hope to find an answer. The group is a recently formed committee called "The Committee on Capital Markets Regulation," whose director is Harvard professor Hal Scott and whose members include several academics such as Allen Ferrell, Reinier Kraakman and John Coffee as well as business and industry leaders such as the chief executives of DuPont and Office Depot and the president of the NYSE. Part of the Committee's charge is to generate a report with recommendations regarding the impact of liability on public companies and gatekeepers as well as the impact of Sarbanes-Oxley, with particular attention on Section 404. All apparently with an eye to determine whether these regulations have caused our markets to be less attractive to investors and thus less competitive.
Legislators have said in the past that regulations such as Sarbanes-Oxley and those seeking to impose greater liability on corporate actors were necessary to restore investor confidence in America's markets. Certainly in the summer of 2002 when the accounting scandals appeared to be at their zenith, there was not only a significant dip in the stock market, but also a significant dip in investor confidence. In fact some of the first pieces of federal legislation included in their title some reference to restoring investor confidence, and that phrase appears repeatedly in the legislative history surrounding the discussion of Sarbanes-Oxley. Now it appears that the concern is that the pendulum has swung too far in the other direction and that the emphasis on accountability embodied in regulations and in increased civil and criminal enforcement associated with corporate actors has diminished the appeal of our capital markets. It will be interesting to see what the Committee discovers.
Of note, one of the charges of the Committee is also to try to determine how we can do a better job of evaluating the costs and benefits of regulation before it is implemented. That is a very good question, yet I wonder how such an evaluation can occur if (like what happened in connection with Sarbanes-Oxley) there is intense political pressure for a regulatory response.
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1. Posted by D. Daniel Sokol on September 14, 2006 @ 5:41 | Permalink
Note that Secretary Paulson made a similar claim in an interview in yesterday's Wall Street Journal that the enforcement pendulum has swung too far. The number of foreign issuances suggests that perhaps the United States has decided that SOX should serve as the new Marshall Plan to revive Europe’s financial markets.
2. Posted by Brett McDonnell on September 14, 2006 @ 10:34 | Permalink
The committee composition makes it look like this is a push for significant de-regulation. To some extent, this is a reasonable pendulum swing--SOX has been more expensive than expected. But I suspect that the pendulum will swing too far. Now that the public glare has gone away, it's time for the interest groups to step in and shape the rules more to their advantage once again.
3. Posted by Auto on September 14, 2006 @ 22:08 | Permalink
What, exactly, is the public interest being service by encouraging companies to list in the US, and not abroad?
I can see why NYSE and Nasdaq care, but why should the ordinary American investor?
4. Posted by Kate Litvak on September 15, 2006 @ 8:41 | Permalink
Brett: I might be missing something, but how does the committee composition signal a push for de-regulation? Who is exactly a major de-regulation type there? Coffee is known for putting forward a theory suggesting that foreign companies flock to the US because of our superior (pre-SOX) laws and regulations – while deregulators cry out for the repeal of a major chunk of those laws and regulations. Kraakman has been promoting a particular type of corporate law to emerging markets – while deregulators dismiss the value of mandatory elements in corporate laws altogether. Ferrell is known for questioning state competition in corporate law and promoting federal corporate law – hardly a deregulatory position.
The panel might well end up suggesting deregulation (and I hope it does!), but I don't see how the panel composition makes de-regulation a foregone conclusion.
As a side note, which serious academic supports SOX anyway? I was trying to get a forceful pro-SOX quote (from an academic article, rather than a political rally) to show the range of opinions in the legal academy, but could find nothing at all. Nobody is thrilled about SOX.
5. Posted by Toby Lucich on September 19, 2006 @ 11:26 | Permalink
While I am a fan of the springboard "restoring investor confidence", I'm left wondering if any but the most sophisticated investors really appreciate the considerable investment that has been made. So much of this act - and now discussions to tone back Section 404 - still occurs at a level that has little meaning to the average investor.
I persist in my hopes that policy makers will turn their attention to educating the public on the necessity of good governance, even as operating professionals continue in their efforts to rationalize and embed control behaviors in the day to day operations of businesses.
Investors place value on reliable, sustainable returns - whether the company is listed domestically or abroad. If good governance has a real cost (resulting in premium pricing for investments listed in the US), investors need to be able to appropriately value the risk-reducing insurance that SOX governance should be providing.
6. Posted by vn index on March 20, 2011 @ 0:02 | Permalink
Nice article, really detailed; and you have covered some really important aspects.One other advantage is there, which is very crucial.
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