February 20, 2006,
Amidst a lawsuit seeking its repeal and separate pressure to simply reduce its negative impact on smaller public firms, supporters of the Sarbanes-Oxley corporate governance law are mobilizing to keep the bill intact. Former SEC chairman Arthur Levitt is arguably the most prominent supporter of Sarbanes-Oxley, stating his case in a recent Wall Street Journal op-ed.
Levitt feels that if the most stringent aspects of Sarbanes-Oxley were reduced for small businesses, it would be “more difficult for smaller companies to attract capital needed for growth and undermine confidence in the markets.” Maybe so, but if what Levitt asserts were in fact true, why would the small-business lobby be so aggressively seeking exemptions?
What the small-business lobby apparently understands, and what Levitt apparently does not, is that small businesses are well aware of what might result from not complying with Sarbanes-Oxley rules. Better yet, they’re willing to weather any negative market reaction to their opting out of the law’s most onerous requirements.
Levitt went on to point out that exemptions for smaller and micro-cap companies “would undermine this renewed trust in our markets” in a way that would “drive up their cost of capital” and “relegate small businesses to a ‘second-class’ in the marketplace.” What’s assumed here is that the same businesses that according to Levitt create “60% to 80% of net new jobs annually” are so ignorant of market realities that they would willingly resist measures that would make them more appealing to investors. In short, Levitt would like us to believe that the very legislators who choose to fund Amtrak on a yearly basis have a clue as to what institutions look for before investing in public companies. More realistically, publicly traded companies are far more sensitive than the federal government to market forces, and as such, will maintain the internal controls necessary to attract capital.
Seeking to bolster the value of Sarbanes-Oxley in the aftermath of Enron’s implosion, Levitt cited “the significant increases in IPO and mergers-and-acquisitions activity” since the law has been in effect. Sadly Levitt, like many big-government types, only resides in the “seen” of economic activity. No doubt IPOs and M&A activity have increased since 2001, but what he ignores is that which did not occur. Indeed, a recent Wall Street Journal editorial noted that of 80 international companies that went public since 2001 on the London Stock Exchange, “90% decided Sarbanes-Oxley made London more attractive” relative to U.S. exchanges.
More damningly for Sarbanes-Oxley advocates, as recently as 2000 nine out of every ten dollars raised by foreign companies through new stock offerings was done in New York. Today, nine out of every ten dollars raised is in London or Luxembourg.
According to the University of Rochester’s Ivy Xiying Zhang, Sarbanes-Oxley has cost “public company shareholders $1.4 trillion,” not to mention the billions of dollars spent on compliance. These numbers are once again the “seen.” What we don’t know is what investors lost when private companies stayed private in order to avoid the law’s draconian rules. We also will never know what opportunities and risks public companies avoided with Sarbanes-Oxley in mind. Former Starwood CEO and founder Barry Sternlicht left his position with liabilities relating to corporate governance rules of which Sarbanes-Oxley was a major factor. How many other entrepreneurs have folded up their tents or kept their companies private out of fear of Sarbanes-Oxley liabilities?
Levitt closed his op-ed warning against “deregulation that makes it more difficult for [companies] to succeed in the public capital markets.” The reality is that public company CEOs know far better than Arthur Levitt what will enable them to succeed in the public markets. The stringent Sarbanes-Oxley rules shouldn’t just be relaxed for small companies, but for companies of all sizes so that disincentives to growth are not erected. Beyond that, companies will on an individual basis abide by internally set controls based on a reasoned assessment of capital markets and what’s required to attract investment. Laws such as Sarbanes-Oxley are superfluous, and for their impact on economic activity, anti-growth.
John Tamny is a writer in Washington, D.C. He can be contacted at email@example.com.