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Rules governing US public markets are driving businesses to overseas exchanges and private sources to raise money, damaging the competitiveness of the American capital markets, a high-profile group of CEOs and academics, including a former economic adviser to President Bush, said Thursday.
The report to the White House makes a number of recommendations, including revising parts of the Sarbanes-Oxley Act - the landmark corporate governance regulations passed in 2002 - that affect small companies, pursuing criminal cases against corporations in only exceptional circumstances and allowing shareholders of certain companies to vote on so-called "poison pills."
"The threat to US competitiveness appears to be real and growing," says the report, which was authored by the Committee on Capital Markets Regulation. The committee is co-chaired by Glenn Hubbard, dean of Columbia Business School and a former White House economic adviser, and John Thornton, a former president of Goldman Sachs who is now chairman of the Brookings Institution.
"There needs to be better cost-benefit analysis" about the consequences of regulation, committee director Hal Scott, a Harvard law professor, said at a press conference Thursday. "We need to do a better job on that."
The report, which makes 32 recommendations spanning shareholders' rights, securities-fraud enforcement and the US regulatory process, is the latest downbeat assessment of the impact of the Sarbanes-Oxley Act on US companies and markets. It comes shortly before a December 13 Securities and Exchange Commission meeting about the law, at which regulators are expected to propose significant changes in the way the law's accounting provisions are implemented.
Decline of IPOs
The committee noted the recent dramatic decline in initial public offerings on US public markets and said it is concerned that the shift to raising money on private markets is an attempt to avoid US disclosure requirements.
IPO money has shown a marked shift, the committee noted. In 2000, half of the dollars raised in global IPOs were raised on a US exchange. By 2005, the amount was only 5%.
"The decline of issuance in the US capital market does not appear to be an accident but rather a sign of a competitiveness shift away from the United States," the report says.
Fewer criminal prosecutions vs. companies
Separately, the committee recommended criminal prosecutions against corporations in "truly exceptional circumstances" only, and recommended reducing costs to shareholders from class-action lawsuits. The group cited the case of Arthur Andersen, saying the company's criminal prosecution led to losses for all of its stakeholders and employees.
Individuals responsible for crimes should be punished but prosecutions versus companies as a whole should be a "last resort," Scott said Thursday.
The securities and bond industries welcomed the group's findings and recommendations.
"The report makes a number of constructive contributions regarding the regulatory process which could dramatically improve the efficiency and competitiveness of our markets," said Marc Lackritz, co-CEO of the Securities Industry and Financial Markets Association.
The critique comes as opposition to the Sarbanes-Oxley Act has been building in recent weeks.
Last week, US Treasury Secretary Henry Paulson said in a speech that parts of the law should be implemented in different ways to save businesses money and time. In comments that dovetail with the committee's report, Paulson singled out Section 404 of the 2002 corporate governance law, which was passed by Congress after accounting scandals at WorldCom and Enron.
According to the report, the average costs of Section 404, which is designed to make sure companies' books are in order, were $4.36 million in 2004.
"Although these costs are coming down, new entrants into the US public markets still will face these large initial costs," the report says. "These costs can be especially significant for smaller companies and foreign companies contemplating entry into the US market."
The committee recommends that US securities regulators ask Congress to give small companies a break from having auditors sign off on their financial statements, if related proposals already on the table are deemed too costly. Such a move would likely save companies money on their accounting bills.
SEC Chairman Christopher Cox said in a recent speech that the changes to be proposed by his agency would reduce the law's costs to investors while raising investor protection.
To boost the attractiveness of US markets further, the committee also recommends making it easier for foreign companies to delist themselves.
"If foreign companies know they can leave US markets, they will be more willing to come in the first place," the report says.
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