To the People

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or TO THE PEOPLE.

Thursday, November 02, 2006

God Save New York, We Mean it, Man

Sarbanes-Oxley, the Congressional legislation enacted in knee-jerk reaction to the Enron and Worldcom scandals, might be the worst legislation ever foisted upon US businesses. Politicians are finally taking notice, as old-time blue chip venture capital firms are opting to return money to investors rather than try to invest it (and make money for themselves) as they see no way to create wealth in the current regulatory environment, and more US companies are going public in London now than they are in New York.

In an op-ed in the WSJ (subscription only) titled "To Save New York, Learn from London," US Senator Charles Schumer and NY Mayor Mike Bloomberg argue that the SOX regulatory climate is destroying New York, and they are not exaggerating.
Unless we improve our corporate climate, we risk allowing New York to lose its pre-eminence in the global financial-services sector. This would be devastating both for our city and nation.

...we have been losing ground as the leader in capital formation. In 2005 only one out of the top 24 IPOs was registered in the U.S., and four were registered in London. Currently, there are more than 10 federal, state and industry regulatory bodies in the U.S. The British have only one such body. Industry experts estimate that the gross financial regulatory costs to U.S. companies are 15 times higher than in Britain. Beyond cost savings, the British enjoy another advantage: While our regulatory bodies are often competing to be the toughest cop on the street, the British regulatory body seems to be more collaborative and solutions-oriented.

With the benefit of hindsight, the Sarbanes-Oxley Act of 2002, which imposed a new regulatory framework on all public companies doing business in the U.S., also needs to be re-examined. Since its passage, auditing expenses for companies doing business in the U.S. have grown far beyond anything Congress had anticipated. Of course, we must not in any way diminish our ability to detect corporate fraud and protect investors. But there appears to be a worrisome trend of corporate leaders focusing inordinate time on compliance minutiae rather than innovative strategies for growth, for fear of facing personal financial penalties from overzealous regulators.
Forbes opines here on the deleterious effects of SOX.
senior management time reviewing SOX-related work has become overwhelming, drawing precious senior attention away from strategy, sales, marketing and other critical strategic activity. This may actually have a greater cost than the service fees.
The Economist had a good take here on SOX and here opines on US prosecutorial excess in corporate trials. Inc. here describes how SOX eats up about 5% of corporate profits, which would roughly translate into the destruction of trillions of dollars of shareholder wealth.