Time to remove our SOX

Chief Executive, The, Sept, 2006

IN A MOVE INTENDED to ensure the future competitiveness of U.S. financial markets, a newly formed commission will recommend changes to the Sarbanes-Oxley Act and other regulatory mandates. "The Committee on Capital Markets Regulation," will be co-chaired by former White House economic advisor Glenn Hubbard and Goldman Sachs president John Thornton. It will submit its recommendations at the end of November.

As we have argued several times in this space, in its zeal to respond to legitimate concerns in the wake of corporate scandals, Congress created a remedy that has proved almost as lethal as the disease it purports to cure.

The total cost of compliance with Sarbanes-Oxley has been pegged at about $4 million to $8 million for the average publicly listed company. Keep in mind that in 2004 GE reported spending $30 million on the internal control requirements (section 404) of Sarbanes Oxley alone.

When business leaders do not stand up and take action to reform the "reform," U.S. capitalism faces a greater calamity than corralling a few crooks. Twenty-four of the last 25 major IPOs took place in markets outside the U.S. Many of these share offerings expressly prohibit American shareholders from participating in capital-raising for fear that companies will be drawn into America's litigation vortex or the extra-territorial reach of the SEC.

Instead of compulsory compliance with Section 404, the most costly element of SOX, why not make it voluntary on condition that companies would be compelled to disclose the degree to which they comply? In this way investors would judge for themselves whether a company's adherence to the rules justifies a market premium or a penalty. For years the quality movement in business has generated voluntary initiatives where firms have decided that in order to be competitive it was worth the time and treasure to meet the standard. Why not reinvent 404 along the lines of a voluntary standard such as ISO/IEC 1701:2006, where hundreds of thousands of organizations worldwide agree on management system certification? Because an ISO approach is international, there's no U.S. imposed SOX-like rule to irritate others. When the whole world adopts an ISO standard, no market is disadvantaged. We challenge the Committee to devise such a system. (Besides, does anyone think Congress knows how to write certification standards?)

Funny how no one complains about competing on quality, so why not compete on management certification?