I have an ongoing conversion with Vinnie on SOX. We agree in an argumentative kind of way most of the time. (sort of a linklovehate) In 2002, SOX was passed into law with a majority of 423-3 in the house, and 99-0 in the Senate. This level of support is rare. America wanted SOX in a big way, or at least its elected representatives did. I wanted to see if there had been any change of opinion since 2002 in those that create and pass laws in the world’s most powerful economy. I googled a bit and came up with this It is much more coherent than the last testimony from the US I read, which talked about the Internet as tubes.
Feeney picks up the two sides of the tale with a series of quotes.
From the Chair of Ernst and Young.
In a March 6, 2006 speech given by James Turley, Chairman and CEO of Ernst and Young, he states, “Sarbanes-Oxley and all of the other changes that have taken place are helping to restore public trust.” He goes on to say “Now, I’m not suggesting that the Sarbanes-Oxley Act or any single action is behind these numbers. But they do clearly suggest that investor confidence and the resultant market activity have strengthened, and not in just a small way.”
As (former) Sun Microsystems CEO Scott McNealy said of Sarbanes-Oxley it’s like “throwing buckets of sand into the gears of the market economy.”
He goes on to illlustrate examples of companies going public and listing abroad because of SOX.
The Congressman provides a good overview of the issues, and suggests.
I believe it is time to review the effects of Sarbanes-Oxley, keep what which is a net advantage to investors, and reform or eliminate those provisions that are a net disadvantage to investors.
Sensible stuff, but not really proposing anything other than a review. If you were rewriting SOX, what would you change?
There is some interesting coverage here of the pressure building against SOX. Holstein quotes from an Oxley interview. It is worth reading the whole thing.
Yes, it needs to be changed because the cost-benefit ratio is out of whack. It’s particularly out of whack for the smaller publicly traded companies. Jeff Immelt sat right here about a year ago and was very praiseworthy of what we did. They spent $36 million in complying with Sarbanes-Oxley, but he told me it needed to be done and that GE is using that as an effective competitive advantage for a global company. They are the best of the best and the cleanest of the clean. Jeff deserves a lot of credit for that. I spoke to the Business Roundtable last week when they were in town and Jeff introduced me. It was interesting because there were some CEOs there who were about ready to take my head off. But he was very supportive and I’ve had several other CEOs, at least in private, say it needed to be done. But I do think you need some tweaks and you need some changes. The last thing I want is for this thing not to work. I want it to work for what it was supposed to do, which was restore investor confidence and provide more transparency and accountability. I think we did all that, but at what cost? That’s the issue that we’re looking for the SEC to deal with.
I also came across this interview with Eric Talley, a law prof from Berkeley. He comments.
Talley:We found two pieces of evidence that are pretty consistent with the idea that Sarbanes-Oxley has imposed a cost mainly on smaller issuers. First, the aggregate amount or the rate at which companies go private relative to their foreign counterparts initially increased in the US. It turns out that that increase is really taking place largely among issuers who have under $50 million market cap. This is a little bit smaller than the $75 million dollar group of companies that are now going to be exempt until 2007 from compliance with the internal control mandates.
An interesting critic of SOX is Larry Ribstein. He has a blog here.
Moving back in the mists of time to february this year, William Donaldson spoke at an event.
“ The returns on Sox are good,” he said, adding that the initial implementation of the law was “flawed.” He said accounting firms demanded more of companies when conducting their annual audits than regulators thought necessary. “We told people they didn’t have to count paperclips.”
The quote that got my attention was that from former SEC chairman Richard Breeden.
Former SEC Chairman Richard Breeden added that however high the costs of complying with the law might be, they pale in comparison to other expenses companies elect to pay.“The implementation costs are one-ten-millionth of executive pay,” Mr. Breeden observed.
Perhaps what needs revising more than anything else is me googling SOX on a Sunday night when I should be doing something more sensible. My wife is sitting next to me blogging on her new mac. check out her blog if SOX bores you. Her prose are much better than mine.
Update: this morning I came across this; Unexpected Benefits Of Sarbanes-Oxley By: Stephen Wagner and Lee Dittmar Deloitte & Touche, Boston, MA (SW); Deloitte Consulting, Philadelphia, PA (LD)Harvard Business Review – April 2006, Pgs. 133-140
Look on the bright side. Even while corporate scandals at places like Enron and WorldCom remain fresh in the minds of CFOs and investment bankers, the Sarbanes-Oxley Act has moved many companies toward better practices and greater efficiency. With all the attention riveted on the headaches and expense involved with compliance, few have stopped to notice that numerous companies have changed for the better over the last two years. According to corporate consultants Stephen Wagner and Lee Dittmar, the benefits emerging from compliance include standardization and consolidation of financial processes, elimination of unnecessary information systems and platforms, automation of manual processes, better integration of acquisitions, and elimination of unnecessary controls.
Hmm. There are many sides to this SOX story….. Technorati tags sox
3 thoughts on “SOX… 4 years on, views from Congressman Tom Feeney, and some other google finds.”
Thanks for all the research. But I was hoping you would find some tangible payback examples from SOX. I have looked and looked. I was actually excited when I saw The Deloitte article (especially with its promising title) you reference but was disappointed as I wrote here.
Yes, I was suprised HBR published it, normally their stuff is a bit more meaty.
The link between good governance and corporate performance is relatively well proven, I can let you have more on this, in the meantime check this out….
Drobetz, a Swiss academic commented in a paper Corporate Governance -legal fiction or economic reality. (2003) helpfully listed some other research.
La Porta et al(2002) provided empirical evidence that firms in more protected legal environments exhibit higher ratios of market value and the replacement value of a firm’s assets.
Lombardo and Pagano (2000) report that stock market returns are positively correlated with measures of the quality of the institutions, such as judicial efficiency and rule of law.
Gompers et al (2001) found that firms with weak shareholder rights are less profitable than those with strong rights.
Drobetz (2003) stated that there are good reasons to believe that adequate legal protection and prosecution capabilities are essential for effective corporate governance.
The return is not on SOX, but on good governance. SOX was a knee jerk reaction to a serious governance problem, but it doesnt change the fact that the US corporate oversight woeful in the 1990s…
What I find encouraging is the interest in good governance from those that aren’t bound by SOX. The costs are out of line, see the Donaldson quote about paperclips.
At SAP we are trying to shape a vision and a solution set that helps with Governance, Risk and Compliance; not just SOX. These three will be around long after SOX.