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Sarbanes-Oxley, lawsuits hinder expansion of global environment |
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By Rep. Ed Royce (R- Calif.)
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Posted: 07/18/07 07:36 PM [ET] |
Earlier this month, the Korean National Assembly approved a significant overhaul of their country’s financial system, with the intention of making Seoul an international financial hub. This should come as no surprise, since they have watched from the sideline as Hong Kong, Dubai and London have recently experienced unprecedented growth in their respective financial markets. With the possible emergence of another financial hub in the global marketplace, the competitiveness of
our capital markets should be further examined.
Three recent major studies on this issue (most notably the Bloomberg-Schumer Report released this January) have detailed strategies that would enable the U.S. to remain competitive. These studies focus considerable attention on two major encumbrances afflicting our public companies. The first is the regulatory environment within the United States, most notably Sarbanes-Oxley and the burdensome requirements it places on such companies. The implementation of Sarbanes-Oxley, specifically Section 404, has resulted in an average cost of $4 million per company — almost 44 times the SEC’s estimate of $91,000 at the time of enactment. The former chairman of the Federal Reserve, Alan Greenspan, referred to Sarbanes-Oxley as “a cost-creator with no benefit I’m aware of.” He continued, “Regulatory and statutory changes need to be made as well, if we’re going to move forward. I hope it happens before the whole financial system walks off to London.” The late Dr. Milton Friedman issued a similar warning last year when he said, “… Sarbanes-Oxley is very unfortunate. It tells every entrepreneur in America: Don’t take risks … The function of the entrepreneur is to take risks, and if he’s forced not to take risks and to spend on accountants rather than products, the economy is not going to expand or grow.” Regrettably, little has been done to correct this wrong and improve the regulatory environment in the United States.
The current status of our legal system and the impact an overly litigious society is having on our public companies should be further examined as well. All three of the recent reports on competitiveness highlight the costs, inefficiencies and uncertainties associated with securities class action lawsuits. The Bloomberg-Schumer Report notes the “prevalence of meritless securities lawsuits and settlements in the U.S. has driven up the apparent and actual cost of business — and driven away potential investors.” The report later suggests that the presence of securities class action lawsuits may be the single most important factor in the decline of the United States from the preeminent position in the global financial services marketplace.
In an effort to stem this problem and limit frivolous securities lawsuits, Congress overrode President Clinton’s veto and passed the Private Securities Litigation Reform Act PSLRA in 1995. Unfortunately, PSLRA has not had the desired effect, and both the size and number of frivolous securities lawsuits remain incredibly high. In many cases the mere threat of legal action, along with the increase in the cost of doing business, forces companies to become more risk-averse. When the average class action settlement is $71 million (a 2005 figure), the tendency to avoid unnecessary risk is understandable.
The Bloomberg-Schumer Report, as well as the other often-cited reports on U.S. competitiveness, portrays an environment full of mandates and expectations difficult to attain by any corporation. Unfortunately, this one-two punch of cumbersome regulation and the prevalence of securities class action lawsuits has had a serious negative impact on our global competitiveness with little, if any, noticeable public benefit. When companies are allocating millions of dollars funding reporting requirements and protecting against frivolous lawsuits they respond by becoming more risk-averse or by looking for alternative markets at home or abroad. This is suggested by the fact that only two of the largest 20 global initial public offerings (IPOs) last year went public in the United States, compared to nine in 2000 and 12 in 2001. Additionally, in recent years we have seen a rapid increase in both public to private buyouts and private placements, further suggesting an evasion of our public markets.
If we hope to reverse this trend and remain the market of choice for the world’s public companies, we must begin to implement legislative and regulatory changes to properly address the problems facing our public companies. The Bloomberg-Schumer Report was an important first step in achieving this goal. But with the number of competing markets around the world constantly increasing, more must be done.
Royce is a member of the House Financial Services and Foreign Affairs committees.
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