U.S. Business Regulations to Be Examined

Stephen DeAngelis

September 14, 2006

Public companies in the U.S., since the introduction of the Sarbanes-Oxley Act, have lamented that such regulations impede their ability to compete globally. While many companies wish such regulations would simply go away, the excesses, corruption, and criminal behavior that spawned the legislation in the first place cut so deep into the U.S. business culture that no amount of wishing will make SOX and other compliance measures disappear. Nevertheless, an article in the Washington Post reports that a prominent group is about to examine the regulatory environment in U.S. businesses must operate [“The Corporate Noose, A Little Too Tight,” by Steven Pearlstein, 13 Sep 2006]. According to the article:

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. The effort was immediately applauded by Hank Paulson, the new secretary of the Treasury, who had already signaled his belief that the regulatory pendulum had swung too far. The committee was the brainchild of Hal Scott, a securities-law expert at Harvard Law School, who enlisted the participation of Glenn Hubbard, dean of the Columbia Business School, and John Thornton, a former co-chairman of Goldman Sachs, as co-chairmen. It starts from the premise that the U.S. markets for stocks, bonds and other securities represent a crown jewel of the economy, a plentiful source of capital for U.S. firms and a fount of high-paying jobs and corporate profits. And its charge is to document the degree to which the United States is losing its dominance in capital markets to places such as London and Hong Kong and to recommend what should be done to slow or reverse that process.

Pearlstein openly wonders if the group’s concerns are not overstated and if their aims are unachievable.

The concerns, while legitimate, are probably overblown. After all, it is rather a quaint idea that the United States would, or even should, be able to maintain its dominance of capital markets in an era of rapid globalization. And if you look at which investment firms are doing the business in Hong Kong and London, you’ll find all the familiar American brands.

He goes on to recommend that the committee look more broadly at the business environment, rather than just the compliance sector.

The committee might also want to spend some time looking for reasons other than regulatory excesses to explain why companies are listing their shares, or trading their derivatives, on foreign shores. Why, for example, are investment banking fees in London about half what they are in New York, and does that have anything to do with where shares are listed? Why have so many hedge funds opened their doors in London, where they are regulated, while they could operate blissfully without regulation anywhere in the United States? Has the much-anticipated fall in the value of the dollar, as a result of the persistent U.S. trade and budget deficits, prompted companies to issue their shares in other currencies? Does the fact that U.S. executives skim off 10 percent of corporate profits for themselves encourage investors to look for share offerings somewhere else?

As Pearlstein implies, globalization has created competitive stressors that will continue to challenge U.S. businesses. But instead of looking to Washington for answers, he suggests they look in the mirror. SOX and other regulations, which large corporations brought upon themselves, are the ante they must now pay to compete in the 21st century business environment. Businesses that can handle those regulations more efficiently and effectively will come out on top. Studies have shown that corporations that comply with regulations that make them more trustworthy have a higher valuation as a result. That’s just one of the benefits of becoming a resilient enterprise.