Critics organize to reform corporate reporting

Kai Ryssdal Sep 12, 2006

KAI RYSSDAL: It’s got sort of a dry name, to be honest. The Committee on Capital Markets Regulation. It’s unofficial, but committee members have an ambitious goal. They want to rewrite all those post-Enron accounting and governance reforms. Including the big one: Sarbanes Oxley. Not too surprising, given that it’s mostly CEOs and other corporate heavyweights on that committee. But they say their concern is a real one. That those reforms are hurting the competitiveness of U.S. stock exchanges, since foreign companies are now listing their shares abroad rather than here. Jim Cox teaches securities law at Duke University. Jim, good to talk to you.

COX: Pleasure to be here.

RYSSDAL: What is it that’s driving this push to change Sarbanes-Oxley and all the rules and regulations that have come about since Enron?

COX: Well, the changes have made the reporting practices of management much more transparent. And management likes to be able to control the game. And what we found is with Sarbanes-Oxley new rules have been introduced so that the accountants are more independent, the directors are much more independent and accountable than they were in the past. As a result, they’re holding management much more accountable. So, management doesn’t like the new rules in the game because it’s reduced something of a competitive advantage that they had in running the business or organization vis a vis the owners of the company.

RYSSDAL: Let’s look at the basic premise of this commission, that Sarbanes-Oxley and rules and regulations are doing damage to U.S. capital markets. What do you think?

COX: I think that there’s been additional costs, clearly, that have been introduced since the passage of Sarbanes-Oxley. It’s not just Sarbanes-0xley. There’s been a tightening up of disclosure requirements independent of Sarbanes-Oxley and listing requirements. But the real issue here is not Sarbanes-Oxley, it’s the fact that there’s been a sea of change that’s been underway for about a decade now in European markets that’s greatly reduced the cost of doing transactions in Europe. And as a result of that, the cost advantages that were enjoyed in the United States have largely disappeared. And as a result, deals more often are going to Europe than they used to go.

RYSSDAL: Well, so what. I mean, really, what happens if all these deals move to other exchanges?

COX: If all these deals move to other exchanges, it would be a real blow to, first, the American economy. It was not that long ago where we could say that 15 percent of the GDP of New York City is largely dependent upon the financial markets that existed there, both the Nasdaq market and the New York Stock Exchange and the allied events that went around it. Second thing is, as long as you have deals occurring in the United States, we have a terrific extraterritorial impact about what happens in other places in the world. And we would lose that influence over transactions, and therefore we would lose some of the influence over our own destiny in that regard.

RYSSDAL: So how are we going to catch up? How are the New York Stock Exchange and the Nasdaq and the Chicago Merc, all of them, how are they going to catch up?

COX: Well, I think what we’ll find is that there’ll be some significant adjustment in the cost structure for underwriting lawyers fees, etc., which are really what’s driving the transactions abroad. Sarbanes-Oxley is something like a scapegoat for driving transactions abroad. It is the high fees that are being demanded by investment banking firms related to these deals as well as the law firms. Those fees are susbstantially lower in Europe than they are here. And unless there’s some serious cost adjustment we’re going to continue to see deals going away.

RYSSDAL: Jim Cox is a professor of law at Duke University. We caught up with him on vacation up in Oregon. Professor Cox, thanks a lot for your time.

COX: My pleasure.

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