04/12/2007 12:00 am EST
April 12, 2007
The recent debate about whether Sarbanes-Oxley and other regulations may cause London to supplant New York as the world’s financial capital has me imagining the following scenario:
Carson City, Nevada—April 12, 2010
Ever since 2006, when Macao surpassed Las Vegas as the world’s gambling capital, state legislators had debated how to regain that crown.
Nevada had strict regulations on who could operate a casino, and some legislators argued that opening the door a little to bookmakers and criminals would encourage entrepreneurship and competition. “Let’s put the sin back in Sin City,” one legislator proclaimed.
As the rules were loosened, the mob returned, if not to its former glory, then to at least more prominence. And through some creative accounting, Vegas did regain its lead over Macao—at least briefly.
So, today, grateful state legislators passed a resolution to put a statue of Benjamin “Bugsy” Siegel, who “discovered” the city for the Mafia, at the heart of the Strip.
OK, that’s a pretty fanciful comparison, and of course I don’t mean to equate corporate executives—at least most of them—with bookmakers.
But this highly organized, well-financed campaign to blame Sarbanes-Oxley for all the supposed woes of US financial markets strikes me as way over the top. And if it goes much further, I fear it may undermine some hard-won protection for investors, who were pretty much fed to the wolves in the late 1990s.
Corporate America’s campaign against Sarbox reached a crescendo a few months ago with the release of two high-profile reports.
The first came from a “blue-ribbon” panel called the Committee on Capital Markets Regulation, co-chaired by Glenn Hubbard, dean of the Columbia Business School. The second was courtesy of McKinsey and Company, sponsored by New York Senator Charles Schumer and Mayor Michael Bloomberg (backed by newly elected Governor Elliot Spitzer), warning that New York City could lose tens of thousands of jobs if it fell too far behind other financial capitals.
Their key piece of evidence for both groups is the paucity of listings by foreign companies on the New York Stock Exchange (and Nasdaq) since the signing of the Sarbanes-Oxley Act by President Bush in July 2002. The Hubbard committee found that the US’s share of total equity capital raised in the world’s top ten countries has fallen to less than 30%, from 41% in 1995.
Sarbanes-Oxley, passed by 99-0 in the Senate amid news about the Enron/WorldCom/Tyco corporate scandals, tried to restore investor confidence in financial markets after the Internet/telecom bust had vaporized an estimated $3 trillion in investors’ wealth.
In brief, the law calls for more independence and more stringent standards for auditing firms, more independent boards of directors, corporate officers’ certification of financial statements, more rapid disclosure of material events, and greater protection for whistle blowers.
But by far, most of the controversy centers on Section 404, which requires that managements maintain adequate internal controls and have the company’s outside auditing firm attest to that.
Am I missing something? Isn’t this just the bare minimum of protection investors should expect from companies whose shares they own?
The devil is in the details, Sarbox’s opponents contend. They claim the costs of compliance with Section 404 are so burdensome, especially for smaller companies, that they don’t want to bother listing their shares here.
A December 2005 study by CRA International for the Big Four accounting firms found, however, that the cost of compliance actually declines by about 40% in the second year of implementation for big and small companies alike. The second-year cost for smaller companies averages $900,000, less than 0.3% of their average annual revenues. (Of course, the smaller the company, the higher the cost proportionally.)
And there are many other reasons besides Sarboxphobia that companies are choosing to list their shares elsewhere.
First, although investment bankers are no longer Wall Street’s Masters of the Universe, their advice doesn’t come cheap: The London-based consulting firm Oxera pegged underwriting fees in the US at around 7%—twice as high as they are in the UK.
Also, many of the major exchanges—the Deutsche Boerse, even the main London Stock Exchange—have struggled to get new listings in recent years. The big exception: London’s Alternative Investment Market (AIM), which has been signing up smaller companies by the boatload, especially from Russia and Eastern Europe.
The reason? It’s as easy to get listed on AIM as it is to find pigeon droppings in Trafalgar Square.
AIM requires no minimum shares and no minimum market capitalization nor any suitability requirement for companies looking to be listed. Its standards are lower than even the US over-the-counter markets were in the pre-Sarbox era. US markets may not have gotten those listings anyway.
In fact, the Financial Times reports there’s growing concern about the impact of such lax regulation “on the standards and reputation of London.”
Finally, the spread of wealth around the world means there are other alternatives for raising money. China in particular is encouraging companies to go public closer to home—either in Hong Kong, which was second to London in IPOs last year with nearly $40 billion raised, or in the nascent Shanghai or Shenzhen exchanges.
This is a natural development for an emerging global economic power and dovetails with the increasing ability of investors—even individuals—to buy foreign stocks directly. Nearly ten times as many institutions own the French shares of Vivendi Universal as own the American Depositary Receipts (ADRs), for example. No wonder the French firm is leaving the NYSE.
Let’s not play taps for the US, though. Chinese companies took in $2.5 billion from IPOs they did here last year—nearly four times the amount they raised in London. And Thomson Financial predicts this year will see the largest number of foreign companies going public in the US since 1994.
Sure, the US can’t be complacent. The Securities and Exchange Commission already has loosened some Section 404 restrictions and it may ease them a little more for smaller companies. But the great thing about US markets is that by and large, investors trust their integrity and have faith in their standards.
Investors lost that sense just a few short years ago. It would be a shame to let it happen again.
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Howard R. Gold is editor-in-chief of MoneyShow.com. The opinions expressed in this commentary are his alone and do not reflect the views of InterShow.