There has been a continuing outcry from Corporate America over the past several years relating to what is claimed to be an over-regulation by the federal government of business. The corporate bosses say there is too much control by government and too much regulation. That myth has been sold effectively by corporate lobbyists to the politicians in Washington. Personally, I don’t believe that government has done its job when it comes to regulating industries such as the oil and drug industries. The New York Times made some interesting observations recently concerning the current state of affairs in Corporate America. Some points, which I consider valid, were made in an editorial concerning what the writer labeled a “Corporate End Run.” I am including this editorial in its entirety for your consideration. Take a look and see if you agree with the writer.
Corporate profits are at record levels. The Dow, too, has climbed past its high-water mark from the dot-com era. Executives reap bigger and bigger paydays, even as wages have stagnated. Meanwhile, the widening investigation into stock-option backdating reminds us that the corporate malfeasance era was much more than just a couple of bad apples like Enron and WorldCom.
It seems almost unbelievable, then, that corporate America would pick this moment to beg for relaxed regulation and enforcement, as well as more protection from investors’ lawsuits. But as Stephen Labaton reported recently in The Times, industry groups are seeking broad new protections for corporations and accounting firms, not through legislation but from the Bush administration through agency rule changes. The rationale is that the high cost of complying with the corporate governance law, the Sarbanes-Oxley Act, along with runaway lawsuits have scared foreign companies away from American stock exchanges. The timing is particularly odd given that the compliance costs associated with the much-reviled Section 404 of Sarbanes-Oxley — which requires audits of companies’ internal financial controls — fell last year, as did the number of investor lawsuits, for the second year in a row.
What has actually happened is that opponents of regulation believe that the coast is clear. The law’s namesakes, Paul Sarbanes and Michael Oxley, are retiring. Kenneth Lay of Enron is dead. The time appears ripe for rollbacks. Advocates of big business like to point to a sharp decline in the United States’ share of global initial stock offerings between 2000 and 2005, hoping that everyone will infer that the cause was the passage of Sarbanes-Oxley in 2002. In fact, that share had been declining since 1996, even before the Asian financial crisis. It hit bottom in 2001 and has risen since.
United States markets lost their dominance of initial stock offerings for numerous reasons that had little to do with regulation. Some of last year’s biggest deals were Chinese and French privatizations. Markets elsewhere are bigger and more liquid than they once were. There are also intangibles, such as America’s recent unpopularity, increased barriers for visa seekers and extraordinary budget and trade deficits, which might make an issuer think twice about a dollar-denominated stock. The London Stock Exchange, one of the leading beneficiaries of the American decline, commissioned a study showing that underwriting fees in London are just three (3%) percent to four (4%) percent of a transaction, compared with an average of six point five (6.5%) percent to seven (7%) percent in the United States.
When workers confront globalization, they are told to adapt, take their pink slips and go to night school. It is the harsh downside of an integrated world economy that has on balance significantly enriched the country. When financiers feel the pinch from competition in Hong Kong and London, they run to the Bush administration for rule changes. America’s investor protections and corporate regulations have made it a nation of share owners, with almost 57 million American households owning stocks either directly or through mutual funds. The Securities and Exchange Commission has already signaled that it will smooth the implementation of Sarbanes-Oxley, especially for smaller companies. And abuses of the private litigation system like pay-to-play should be stopped. There is room for reform. But overall, the system is working. It may need tweaks, but it does not need a revamping.
The New York Times
November 12, 2006
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