SOX, Innovation, and Resilience

Stephen DeAngelis

March 06, 2006

Bob Greifeld, President and CEO of NASDAQ, argues today in the Wall Street Journal op-ed (“It’s Time To Pull Up Our SOX,” The Wall Street Journal, March 6, 2006, page A 14; link for subscribers only) in favor of Sarbanes-Oxley reform that would relieve the burden of Section 404 requirements on small companies.

Ironically, by setting the bar so high in the U.S., SOX has had the unintended consequence of triggering a “race to the bottom” by stock markets and companies seeking advantage via less jeopardy, less regulation, less cost and less hassle. International business clearly perceives a “problem” with U.S. markets today, and the perception of burdensome, costly regulation has become an article of faith. This entrenched perception exists outside the bounds of reality. It is a heavy, and unnecessary, price to pay for the important benefits and welcome reforms that have resulted from SOX.

How do we deal with the serious issues created by SOX without diminishing the advances in transparency and corporate governance it brings to the marketplace? We start with the realization that a “race to the bottom” can only be self-defeating. We know that markets that fail to deal with the issues addressed by SOX will experience the same trauma, scandal and plunging investor confidence that triggered legislation in this country. It is not a matter of whether; it is simply a question of when.

Our answer is that we believe in the enduring value of the American marketplace. We also believe in the power and creativity of companies, markets and investors to bring new solutions to bear on business issues. As the global governance debate advances, we are inviting companies and worldwide capital markets to help make the race to the top a reasoned, intelligent one. If we can self-initiate such a contest, we can avoid overreaching regulation that constricts business and stifles initiative.

Italics mine.  Of course, Greifeld’s case is NASDAQ’s case for a reduced regulatory burden that would in turn drive listings.  But other kinds of creativity are also possible that can drive still more new solutions.  The process steps by which companies comply with Section 404 are rules-based — and therefore are prime candidates for automation.  A resilient approach to compliance is another way of reducing the cost and resource burden — on all companies, but with particular benefit for the small and midsize companies that Greifeld is concerned with.  Resilient compliance systems are not an alternative to regulatory reform — in fact, they can accommodate regulatory changes, because the automated processes involved are dynamic and updatable.  But with or without regulatory change, a resilient approach to compliance represents exactly the sort of creativity that Greifeld demands.