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Wednesday, December 22, 2004

Diminishing Returns

This study reported in IBD blames SOX for the decline of non-US companies listing their shares in US markets. Europe will soon have its own version of SOX, and the study really fails to see the real reason for the decline from 2000 to 2004 -- the collapse of the economic bubble and resulting recession! SOX is a pain for every company, but let's not blame world hunger on this one regulation.

Diminishing Returns

Governance: Philosopher Frederic Bastiat famously observed that all economic actions have consequences seen and unseen — as in those wrought by Sen. Paul Sarbanes and Rep. Michael Oxley.

Sarbanes, D-Md., and Oxley, R-Ohio, authored the landmark 2002 legislation that seeks to bring more accountability to corporate governance after the Enron and WorldCom bankruptcies.

And judging from the dearth of recent scandals, as well as the howls from executive offices and boardrooms about costs of compliance, the statute is certainly having observable effects.
As for unintended consequences, most are still to be quantified. These include decisions deferred, risks not taken and investments not made for fear of running afoul of the law's onerous rules.

Some consequences are already clear — as a recent decision by China's flagship airline illustrated. Due in part to what foreign firms view as Sarbanes-Oxley heavy-handedness, Air China came public not on America's premier exchange in New York, but on London's.

Until now, the NYSE has gotten more than its share of big China deals. Thirty companies based on the mainland or in Hong Kong and Taiwan now trade on the Big Board. Among them are three of the biggest IPOs in the last year or so — China Life Insurance, China Netcom and Semiconductor Manufacturing International.

Air China's $1 billion offering was the first big China deal that the NYSE didn't land of late. A good question for Messrs. Sarbanes and Oxley, as well as other politicians eager to rein in business, is whether it will be the last.

We know the question is on the mind of NYSE chief John Thain. He posed it six months ago, when he noted the decline of non-U.S. companies listing on the NYSE since Sarbanes-Oxley took effect in mid-2002.

The statute and especially a section requiring CEOs and CFOs to sign off on financial statements "take time, effort and resources to implement," Thain told the Economic Club of New York.

"The value proposition for overseas companies seeking to list in the U.S. — and to remain listed — changes significantly when the costs of meeting our reporting requirements are so high."
Such costs presumably will come down as compliance procedures are worked out. And Europe may soon face its own version of Sarbanes-Oxley as it deals with Enron-like scandals such as Parmalat.

Somehow that doesn't make us feel any better about the loss of business and competitiveness that Sarbanes-Oxley is causing.

Thain put it best: "American standards of corporate governance should not become the enemy of economic performance."

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