A BIG APPLE STRATEGY
By: Mortimer B. Zuckerman
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N EW YORK CITY HAS LONG CONSIDERED ITSELF THE CAPITAL OF THE WORLD. SOME MAY THINK THAT A PRIDEFUL CONCEIT, EVEN THOUGH SOME 45 MILLION VISITORS DESCEND ON IT EACH YEAR. BUT SINCE 1950, NOBODY COULD ARGUE WITH NEW YORK’S CLAIM TO HAVE REPLACED LONDON AS THE WORLD’S FINANCIAL CAPITAL.
NEW YORK IS HOME TO THE BROADEST, MOST EFFICIENT, AND LIQUID CAPITAL MARKETS AND BOASTS THE HIGHEST CONCENTRATION OF THE WORLD’S LARGEST FINANCIAL FIRMS. NOW , HOWEVER, NEW YORK IS CHALLENGED--—AND THE EVIDENCE IS IN THE NUMBERS .
LAST YEAR, ONLY TWO OF THE 25 LARGEST INTERNATIONAL INITIAL PUBLIC OFFERINGS WERE ISSUED BY FIRMS USING AMERICAN CAPITAL MARKETS.
LONDON’S ALTERNATIVE INVESTMENT MARKET, INSTEAD, HAS BECOME THE EXCHANGE OF CHOICE FOR LISTINGS BY SMALL COMPANIES, WITH 433 NEW IPOs LAST YEAR ALONE, VERSUS JUST 155 ON NEW YORK’S NASDAQ. IN 2000, BY CONTRAST, 90 PERCENT OF THE FUNDS RAISED BY LARGE FOREIGN COMPANIES IN NEW IPOs WERE RAISED IN THE UNITED STATES.
Today those numbers have been stood on their heads: Just 10 percent of new offerings are issued in the United States while 90 percent are raised outside. Over the past six years, the number of non-U.S. IPOs listed here has fallen by almost 75 percent. At the same time, a number of foreign companies have left the New York Stock and Nasdaq exchanges while more and more American companies are opting to leave the public markets and take themselves private.
What’s going on? It’s called Sarbanes-Oxley.
That’s the federal law that was enacted in the wake of the Enron, Tyco, and WorldCom scandals. The law offers benefits of transparency, accountability, and investor protection. Fine, but as our insightful new treasury secretary, Henry Paulson, pointed out just last week, the law also has a seemingly innocuous section, known as 404, that has proved to be real corporate overkill.
Sarbanes-Oxley was intended to prevent a repeat of the terrible corporate scandals we have seen over the past few years, but the exhaustive audits the law requires have more than doubled the costs for outside auditors. Large companies, in one study, fund nearly 70,000 man-hours of audit time—an average of $2.4 million more per year than expected.
It is reasonable to ask whether doubling the costs has yielded double the benefits— except for providing a bonanza and a fat refirement plan for accountants, auditors, and lawyers. The onerous costs of Sarbanes-Oxley, more-over falls disproportionately on small- and midcap com ppanies—the very ones that provide the innovations and entrepreneurship we rely on for economic growth. That one e straw might not break the camel’s back, but there are more.
According to a recent Ernst & Young survey, Sarbanes-Oxley has also created a sharper adversarial relationship between corporate boards and management. Boards now tend to focus more on regulatory-compliance issues than on competitive strategies, with members less worried about falling behind than falling afoul of the complex rules of Section 404.
There’s also a third straw on the poor camel’s back.
Last year, class action lawsuits cost American corporations an astonishing $9.6 billion, compared with just $150 million in 1997. We must stop so many obvious frivolous lawsuits. On top of this, we have at least 10 fedoral, state, and regulatory bodies compared with only one in Britain, with each more aggressive than the next. Britain’s single oversight body has found ways to reduce the cost of doing business there to less than 10 percent of what it is here. Can we not learn from this?
Hedge funds and private-equity funds have seen the opportunities created by this mood of repression. Directors are often so nervous about being second-guessed and worried about personal liability that they’re more prone to sell to hedge funds seeking a takeover company rather than fight them. What’s the reward for them to take the risk?
The same goes for management. If their companies go private, they can resolve all these tensions, including the public brouhaha over their compensation. Given all this, it’s easy to see why there is such an accelerating exodus of public companies from the whole American system of regulations; many leave the country, many others just go private. We need a thoughtful readjustment. The aims of a revised Sarbanes-Oxley would be to lower the cost of compliance, especially for small companies and certain foreign companies that come into our financial markets; to relieve some of the burden of the bureaucracy imposed by the law’s disclosure rules; and to identify ways to encourage corporate boards to focus less on fretful compliance and more on creative competitiveness.
Regulation is necessary for sound corporate governance, but when the regulatory burdens pass a tipping point they drive businesses to find more welcoming environments. Genoa, Venice, Florence, and Amsterdam were once the financial capitals of the world. There’s no reason why New York should follow in their footsteps..
U. S. NEWS & WORLD REPORT
December 4, 2006 - - Editorial (Pg. 68)
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