In this, the disappointing denouement of Barack Obama’s first term — and quite likely his entire presidency — the paramount concern is jobs, jobs, jobs. A Jobs Council, packed with CEOs, is hard at work developing a bouillabaisse of proposals to help get the U.S. back to work.
In its most recent interim report, the Jobs Council took aim at what it saw as a problem: the investor-protection laws, notably Sarbanes-Oxley, created in the wake of the disasters at Enron and WorldCom. The council suggests exempting U.S. companies with a market capitalization of $1-billion or less, or, alternatively, giving companies a five-year pass from Sarbanes-Oxley from the date they go public.
And Mr. Obama, giving the lie to opponents who complain of his hostility to business, has embraced the council’s document. According to the website politico.com, he’s eager to see what “tweaks” and “carve-outs” can be made to Sarbanes-Oxley.
It has come to this, then: In the all-consuming desire to do something, nearly anything, to promote job creation, Mr. Obama seems willing to gut one of the most significant investor protections of our time. If the anti-Sarbanes Oxley proposal succeeds, it is the Americans - and Canadians - who invest in U.S. stocks who will lose.
Sarbanes-Oxley, among many things, required the chief executive officer and chief financial officer publicly sign off on the accuracy of company financial reports and, with its “404” provisions, forced companies to document the internal controls used to produce accurate financial statements. Separately, the “Spitzer Decree” tried to improve the quality of analyst research by cutting the link between it and deal fees. And the Fair Disclosure Act set up rules to keep companies from whispering material information to favoured investors.
The Jobs Council is taking aim at all of it, suggesting rules be “right-sized” to exempt all but the largest companies. “Well-intentioned regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies,” the Jobs Council said in its interim report.
Unfortunately, the Jobs Council misunderstands or misrepresents the history of Sarbanes-Oxley and proposes a sledgehammer solution that fails to kill the fly, while smashing investors in the chops.
While Enron and WorldCom provided the political impetus to get Sarbanes-Oxley passed, there were sound intellectual underpinnings to the 404 provisions, which required companies to spend significant sums on improving internal controls. U.S. companies, absent regulation, simply weren’t spending the time or money required to do the best possible job of producing accurate financial statements.
Smaller companies, particularly those who recently went public, often were the worst offenders; they are now the companies the Jobs Council most wants to spare from the provisions.
The Jobs Council, however, in suggesting a $1-billion market cap, would exempt nearly two-thirds of the roughly 5,700 public companies on the major U.S. stock exchanges.
Meanwhile, as noted by Barbara Roper, the director of investor protection at the Consumer Federation of America, Sarbanes-Oxley can’t be blamed for the share of IPOs smaller than $50-million falling from 80 per cent in the 1990s to 20 per cent in the 2000s. The internal-controls audit requirement, Ms. Roper notes, was never implemented for companies under $75-million in market capitalization. A more likely factor: the 1990s stock-market bubble, which ended rather decisively in the first year of the following decade.
“The Jobs Council looks at job losses that are the direct result of a financial crisis brought on by weak financial regulation and proposes as a solution further weakening regulations,” Ms. Roper says. “[The pre-Sarbanes Oxley]accounting scandals, and the costly restatements that followed, were the job killers. If this proposal is adopted, we can expect a repeat of that painful lesson, with even worse consequences for our fragile economy.”
And, as well, consequences for Canadian investors, who in the last decade have been rewarded for their faith in their southern neighbour with plenty of unnecessary risk and little return. In the name of job creation, however, Mr. Obama seems to have embraced the misplaced deregulation fervour of his enemies, increasing the likelihood of more Wild West years in the U.S. capital markets.
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