Shareholder Protection…At What Cost?

While we don’t know exactly how many small public companies are abandoning the public markets by going private, there has been a sharp increase in the number of companies doing so, and others are looking at the option. According to a study by Milwaukee law firm Foley & Lardner, one-fifth of U.S. public corporations are considering going private to avoid governance regulation costs.

Another hidden cost of SOX is that it distracts management and boards of directors from the task of running their companies. Hank Greenberg, chairman of AIG, Inc., an insurance company based in New York, spoke for many CEOs when he said, “Some of us have two jobs: The regulatory burden by day and running the company by night.” Management and boards are focused on compliance, disclosure, and transparency issues instead of how to win in the marketplace.

It’s getting harder to attract people with stature or knowledge to join a public company board these days. As one executive recently told me, “I’d rather have an autopsy while still alive than join a public company board.” Officers’ liability insurance has increased in price to cover the increased requirements of SOX.

Half Empty or Half Full?

My granddad, who was a sheriff in Arkansas during a bygone era, always said that there’s nothing like a public hanging to get the town folks’ attention. I’m totally in favor of prosecuting executive thugs who make bad decisions tilting in favor of fraud, illegal insider trading, or other unethical behavior. If SOX regulations stop people from committing these atrocious acts, then I’m all in favor of them. However, we’ve learned that the cure is oftentimes worse than the disease.

In that regard, we need to remind ourselves that the great majority of the leaders in corporate America are honorable people. They go to work each day with the intent of doing what’s right and honorable. The same is true for the thousands of good boards of directors who are faithfully serving the interests of shareholders.

Clearly, there are positive aspects of SOX compliance, too, including strengthening control environments, making internal operations more efficient, and increasing the power of the audit committee. Every business can benefit from these efforts. In fact, Harvard Business Review published an article, “The Unexpected Benefits of Sarbanes-Oxley,” in April 2006. The article asserts that if companies stop complaining about SOX, and look at the glass as half full, they can realize benefits such as having better control over operations and reducing compliance costs.

After reading that article, I thought that I shouldn’t have such a jaded attitude toward SOX. But then I noticed who the authors were: a managing partner at Deloitte & Touche and the leader of Deloitte’s SOX consulting practice! Talk about getting my heart rate racing!

As with so many things in life, perhaps your opinion on SOX depends upon where you sit, whether it’s in the corner office of a business, in the office of an auditing or law firm, or in an office on Capitol Hill. But who is speaking out for the shareholders across the country sitting at their kitchen tables reviewing their 401(k) statements? In the end, they are the ones paying for the cost of SOX regulations, and I don’t believe SOX is working for them. Isn’t it a shame that shareholders and taxpayers feel the unintended consequences of good intentions gone awry?