The state of America
24 January 2005
While over the last few weeks the corporate backlash against the Sarbanes-Oxley legislation has gathered further momentum on both sides of the Atlantic, there are some businesses that are beginning to see the benefits. Albeit reluctantly.
“It’s almost like the teenager who says, ‘I’m really mad at my parents – it’s taken me all day, but actually I’m really glad to have cleaned up my bedroom’,” says David Martin, head of US firm Covington & Burling’s securities group and the former director of the corporate finance division at the Securities and Exchange Commission (SEC). “At the moment it’s not totally clear that it would ever have been done if they hadn’t been told to do it,” he says. “But we’ll never know.”
Over the last month, European companies such as BT and the Rank Group in the UK and Siemens in Germany have stepped up the pressure on the SEC by threatening to delist their shares from the New York Stock Exchange (NYSE) as a reaction to the extra burden that the controversial legislation imposes on them. The Confederation of British Industry (CBI) took its members’ cause to Washington DC in December to meet with SEC chairman William Donaldson. Digby Jones, CBI director-general, argued that Sarbanes-Oxley was “endangering New York’s role as an international location to raise capital”.
“I’ve got 72 members who have listings in the US, and the biggest thing that annoys them is that America came up with this law in a very knee-jerk fashion and didn’t consult in any way with companies outside the US,” continues Jones. “Many of my members will say publicly, ‘We’ve just got to get on with it and comply with the act’; but privately they’re telling me it’s increasingly difficult to raise capital in the US and that many of them are thinking of delisting from the US altogether.”
But will US regulators pay much heed to the objections of the Europeans? According to Covington’s Martin, who was also counsel to the SEC chair, the SEC will listen. “What people say and do are two separate things,” he reflects. “But there’s a certain momentum that can be created just by the threat [of delisting].”
The SEC does seem prepared to listen. Last month it announced the establishment of a taskforce to make recommendations on how the SEC could write rules that differentiate between large and smaller listed companies. Martin, who left the SEC very shortly before the legislation was introduced, shares the corporate community’s concerns. “I thought [the legislation] was an understandable reaction, but an unfortunate one,” he says. “At the end of the day, I thought it was an overreaction.”
Sarbanes-Oxley has “focused the minds” of the CBI’s members, says Susannah Haan, senior legal adviser at the CBI. It has forced many to conduct “a costs benefits analysis” of their US presence, she says.
“Companies are now asking themselves exactly what benefit they get from being listed in the US if they have a listing in London as well,” insists Haan. “In some cases they do get the benefits – they have a large number of shareholders and do a lot of business. However, some companies don’t and they’re now looking at the costs, which are quite considerable.”
The CBI wants the SEC to ease the US reporting requirements on companies that delist from US exchanges. Currently, they must continue to make filings with the SEC unless their number of US resident investors falls below 300. Haan does not anticipate “wholesale deregistration” by UK businesses, though. “It will probably be in small numbers and because their expectations of what they would get from the US market haven’t really materialised,” she says. “Companies will want to turn around to their shareholders and say that this really hasn’t worked out.”
It is Section 404, which requires companies to have internal controls to guard against fraud and ensure good financial reporting, that has caused the most angst. “It requires both a management report of internal controls and also an auditor’s attestation on the management report,” explains Jim Bartos, a partner at Shearman & Sterling. “This effectively means that the auditor must audit the internal controls – and that’s something new in the US system. So there is the expensive and time-consuming process to put in place an audit trail in the first place, and then, on an ongoing basis, they’ll have the time and expense of an annual audit on internal controls in addition to the audit on financial systems.”
It has been reported that BT was anticipating a 30 per cent increase in auditing costs from July, when the new rules come into effect, on the £3.8m it has already paid its auditor PricewaterhouseCoopers, for example.
Concerns on this side of the Atlantic have been echoed in the US, where companies are also looking at delisting. “There are different constituencies that are speaking out,” comments Amy Seidel, who heads US firm Faegre & Benson’s initiatives on Sarbanes-Oxley. In particular, she says that it is the smaller businesses that have been most vocal in expressing their concerns. “I’ve had several companies choose to become private companies and they cite as one of their rationales for going private the impact of Sarbanes-Oxley,” she says. “And that does take away one kind of investment from the market, because those companies are higher risk but perhaps also they represent greater reward possibilities.” She contrasts them with “some of the more stable blue-chip companies that are steady, but in a better position to be able to afford the additional cost”.
So what does she make of the prospect of the likes of BT and other major European companies delisting? It is “an unfortunate outcome, and probably not one which the regulators were hoping for”, she says. Seidel believes that the SEC is listening and cites the taskforce, aimed at helping smaller public companies, as evidence. “It does show at least that the SEC is concerned that the regulations have made being a public company too expensive for many companies,” she says. “As a result, we’re depriving the market of good investment opportunities.”