Corporations, Compliance, & Competitiveness

Stephen DeAngelis

November 30, 2006

Back in September, I noted that a distinguished group of academics, financiers, lawyers and corporate executives announced that it would be conducting a major study of whether such regulatory excesses posed a threat to the competitiveness of U.S. public capital markets [U.S. Business Regulations to Be Examined]. Treasury Secretary Henry M. Paulson Jr., was quick to applaud such a study indicating that he believed over-regulation of public corporations was a problem. Today Paulson issues a report “that argues that the United States may be losing its preeminent position in global capital markets to foreign stock exchanges because of costly regulations and nettlesome private lawsuits.” [“Five Years After Enron, Firms Seek Weaker Rules,” by Carrie Johnson, Washington Post, 29 November 2006]. Apparently the recent elections have spurred interest groups to intensify their campaign to roll back some of the more stringent rules that Congress put in place following the Enron and WorldCom fiascoes.

Interest groups are trying to build political support to review long-standing rules that govern companies, as well as parts of the 2002 Sarbanes-Oxley law, which imposed stringent responsibilities on accountants, boards of directors and corporate executives. Some key members of Congress have recently expressed concern that U.S. companies may be over-regulated. For example, Sen. Charles E. Schumer (D-N.Y.) joined New York City Mayor Michael R. Bloomberg (R) to commission a study by McKinsey & Co. on whether U.S. stock exchanges are losing listings to more lightly regulated overseas markets. Sen. Christopher J. Dodd (D-Conn.), who is set to head the Banking Committee, has expressed skepticism that the Sarbanes-Oxley law has led businesses to flee overseas but has signaled a willingness to hold hearings next year on how the legislation is working. The business groups are initially focused on getting rules changed at the Securities and Exchange Commission, the independent federal agency that oversees U.S. capital markets and companies. The growing bipartisan concern about over-regulation will help set the tone for deliberations at the agency, which is led by Christopher Cox, a Republican and former congressman from California.

Business groups are counting on the fact that most of the high profile cases associated with the corporate scandals are settled and the memories of those scandals are fading from the public’s mind. These groups are thrilled that discussions about over-regulation are replacing discussions about corporate greed and corruption. The U.S. Chamber of Commerce is scheduled to release its own report next year (it’s conclusions apparently already determined).

The chamber plans to publish its own study next year that attacks what it views as duplicative rules and overly aggressive enforcement by securities regulators. The renewed push to soften government oversight of business comes as the outcry begins to diminish over a series of financial scandals that erupted five years ago after Enron collapsed, costing thousands of employees their jobs and wiping out billions of investor dollars. The phony accounting at Enron and the bankruptcy of WorldCom months later prompted Congress to pass the Sarbanes-Oxley law. The chamber panel studying regulation contains several prominent Democrats, including two members of President Bill Clinton’s Cabinet — William M. Daley, who headed the Commerce Department, and former U.S. trade representative Mickey Kantor. Lobbyists at the chamber are moving to line up meetings with Dodd, who is considering a bid for the presidency in 2008, and soon-to-be House Financial Services Chairman Barney Frank (D-Mass.). Frank recently spoke in general terms of his willingness to compromise with business on some matters to win concessions on minimum-wage legislation and housing reforms.

While I’m not certain that the public’s memory is as short as the Chamber of Commerce thinks it is, I know that a Democratic Congress will remember that the scandals took place while the Republicans were in charge and won’t want to look like it is soft on corruption before the next presidential election. Some adjustments to current regulations may be in order, but how far the new Congress compromises in order to get minimum wage legislation passed is yet to be determined.

The current drive to roll back regulation pivots on a complex rule that requires companies to assess their financial controls to prevent fraud and mistakes. The provision, contained in Sarbanes-Oxley, has proved more expensive than regulators envisioned, particularly for small businesses. With the encouragement of senior federal lawmakers, officials from the SEC and the Public Company Accounting Oversight Board, which sets rules and oversees accountants, are meeting to hash out an accord on scaling back the rule. How far they go, perhaps effectively exempting smaller companies, is raising intense concerns from those who think the rules are necessary to protect investors from fraud. If they decide to exempt small companies, that would take out “the guts of getting accounting and auditing straightened out” after years of cursory reviews by accountants helped fuel financial scandals, warned Charles A. Bowsher, former comptroller general.

The report released by Paulson’s office advocates raising the standard for charging companies with crimes and proposes shielding accountants from fraud lawsuits under certain circumstances. Corporations have yet to win back the trust and confidence of most Americans and corporate America would suffer under a new round of scandals. Let’s hope that Congress is wise enough to find a compromise that maintains American competitiveness without opening the door for further corporate abuses.