America used to boast the most hospitable business climate in the world. Recently, though, U.S. businesses have lost their edge, giving a slight advantage to foreign financial hubs.
On July 11, the London Stock Exchange (LSE) affirmed that it drew 50 international initial public offerings (IPOs) from 15 different countries in the first half of 2006. Compare that to the combined 15 international IPOs offered on the Nasdaq and New York Stock Exhange in the similar period.
At the root of this recent and startling shift is the 2002 Sarbanes-Oxley Act. Imposed after the fall of Enron and WorldCom, this law has hamstrung our public companies and forced them to buck their tradition of innovation by becoming too cautious and careful. Though some type of legislation was necessary in the wake of the accounting frauds, Congress acted without prudence or prescience. Its overreaching caused long-term negative economic consequences — at an estimated cost of $1 trillion, according to Dr. Ivy Zhang, now of the University of Minnesota — that are even greater than the initial damage.
It used to be near guaranteed that IPOs would take place in New York City. But they have naturally gone where they can get more bang for their buck and where there is less oversight from government regulators. Major companies in China, Russia, and even Saudi Arabia have all decided against offerings in the U.S. since the inception of Sarbox. The law also has caused mass de-listings from U.S. exchanges as businesses have opted for one-way tickets to markets in London, Belgium, Paris, and Hong Kong.
In addition to the LSE’s declaration, a recent survey by European audit firm Mazars revealed that almost one-fifth of European companies currently listed on U.S. exchanges are looking for an exit strategy. There’s a clear winner here, and it’s not America. The blame falls squarely on the burdensome shoulders of Sarbox and the corresponding inaction of the Securities and Exchange Commission.
This is not only Wall Street’s problem: When companies choose foreign markets for their IPOs, it’s bad news for all Americans. Though the U.S. still leads in global capital formation and investment, other economies, such as China and Britain, are gaining ground. This raises serious concerns about our global standing — in terms of keeping our money in our markets, listings on our shores, and jobs in our companies.
Businesses have implored the SEC to ease its heavy regulatory hand, yet it has plowed forward with Sarbox implementation and rebuffed protests from businesses — at least until now.
The SEC, also on July 11, announced that it will seek feedback on its “concept release,” which will guide companies on future Sarbox implementation. These rules are meant to formalize compliance procedures for management, the hope being that they will lead to lower costs for compliers and help blow away the current air of executive and director paranoia.
By appealing for recommendations, the SEC appears at last to be listening to our overregulated public companies. But this development is too little too late. For the loose coalition of pro-growth proponents, executives, and free-marketeers, now is not the time for complacency: The SEC’s feet must continue to be held to the fire. More — or, actually, less — in the way of regulation must be the outcome.
The irony of Sarbox is that businesses now are shrouded in more secrecy, not less. Public companies that decide to go private or shift their listings abroad are only latching the shutters on investors. It is not that they have anything to hide; on the contrary, they just want to go about their business of doing business.
Regulators may be taking the first steps toward leveling the global economic playing field that has for at least the past two years tilted in the direction of Europe and Asia. But even with these SEC concessions, Sarbox will still cause America to lose its market dominance. Global companies not looking to list on U.S. exchanges is one matter; U.S. companies listing abroad is another.
Thankfully, and not a moment too soon, Rep. Tom Feeney (R., Fla.) and Sen. Jim DeMint (R., S.C.) have proposed a solution: the Competitive and Open Markets that Protect and Enhance the Treatment of Entrepreneurs Act (a.k.a. COMPETE). This measure would exempt smaller public companies from Sarbox compliance, as well as further define the regulatory parameters of the Public Company Accounting Oversight Board, which sprung up alongside Sarbox. The SEC should have moved on this front a long time ago, but now it’s up to all our legislators.
U.S. financial markets cannot thrive if they are put at a competitive disadvantage on the global stage. In announcing its “concept release,” the SEC stated that “investors are entitled to rely upon” quality financial reporting. Indeed. But what if America’s investors cannot see that reporting from across an ocean?
– Mallory Factor is the chairman of the Free Enterprise Fund.