Time to kill Sarbanes-Oxley
"It has been six years since Congress passed the Sarbanes-Oxley Act after the devastating accounting irregularities of Enron and WorldCom. While the intent of the law was to prevent corporate fraud, there is growing evidence that it has done more harm than good, and is undermining the venture-capital industry in Silicon Valley. Now, with signs that our economy is moving toward recession, Congress should take this opportunity to repeal the law.
Rep. Michael G. Oxley, R-Ohio, recently said in an interview with the International Herald Tribune that Sarbanes-Oxley was passed in haste. "Frankly, I would have written it differently. ... Everyone felt like Rome was burning."
Sarbanes-Oxley went too far in regulating corporate governance, resulting in at least three unintended consequences.
-- It was insufficient at preventing insolvencies and accounting shortfalls in companies such as Bear Sterns, Lehman Bros., American International Group (AIG) and Merrill Lynch.
Estimates from leading figures in the venture-capital community indicate the average company will now take 12 years before it can successfully issue an initial public offering (up from five years pre-Sarbanes-Oxley) because they do not have enough capital to cover the estimated $4.36 million hidden tax in yearly compliance costs, according to an estimate by the Financial Executives International. (The initial estimate from the Securities and Exchange Commission was approximately $91,000 per company on average.) Sarbanes-Oxley turned out in practice to cost small companies 50 times more than the SEC estimated. Oxley said the law gave the accounting industry "almost carte blanche to do almost everything they wanted to do, which turned out to be far more expensive than anticipated. ... They just went crazy."
In addition, by creating criminal liabilities for board members, Sarbanes-Oxley has made it harder to find experienced members to join corporate boards.
-- It initiated a movement among smaller public companies to return to private status or merge. In 2006, the law firm Foley & Lardner LLP conducted a survey of 114 public companies on the effects of Sarbanes-Oxley. Twenty-one percent of companies were considering going private, 10 percent were considering selling the company, and 8 percent were considering merging with another company. These respondents mostly were companies with less than $1 billion in annual revenue.
-- It is resulting in a trend where companies choose to go public on foreign, not American, stock exchanges. In 2005, a report by the London Stock Exchange cited that about 38 percent of the international companies surveyed said they had considered issuing securities in the United States. Of those, 90 percent said the onerous demands of the new Sarbanes-Oxley corporate governance law had made London listing more attractive.
The effect of Sarbanes-Oxley in Silicon Valley has been especially dramatic. In the second quarter of 2008, there were no public offerings of Silicon Valley venture capital-backed companies, a phenomenon not seen since 1978. In the third quarter, there was only one. Sarbanes-Oxley has had a direct effect on venture capital. Indeed, if Sarbanes-Oxley is not repealed, then we could see Silicon Valley's status as a hotbed of innovation erode and see more and more of the future invented outside of the United States.
Bernie Marcus has indicated that he could not have founded Home Depot under Sarbanes-Oxley rules. With a new presidential administration and a Congress convening in less than three months, now is the time to begin thinking through the solutions needed to address our economic challenges. Economic growth in a sound market economy requires smart regulation, not destructive regulation that hurts economic growth. Sarbanes-Oxley fails that test. It should be repealed.
Newt Gingrich is the former speaker of the House of Representatives and general chairman, and David W. Kralik is director of Internet strategy and manager of the Silicon Valley office of American Solutions."
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