Corporate Governance

SOX and Protecting the NYSE from Itself

By J. Robert Brown

We haven't heard any good SOX bashing lately, particulary in an era when the need for more rather than less regulation of corporate governance is the order of the day.  Nonetheless, we were treated to a dose of criticism by Duncan Niederauer, the CEO of the NYSE.  After discussing the delisting of the insurance giant, Allianz, and conceding that the company went home because of deeper, more liquid markets, he turned his sights on SOX.

• The bad news, according to Mr. Niederauer, is that while Allianz had some legitimate reasons to delist, the 2002 Sarbanes-Oxley law may very well have been the nail in the coffin. The act—which increased the reporting burden on companies—is "one of the things that has made us less competitive," and "hurt the U.S. capital markets competitiveness."

• How so? He says some companies "use it as a differentiator because they don't have a strong reputation and don't come from markets with solid regulatory oversight." But "I'm afraid in the case of companies like Allianz, it's a drag," because complying with Sarbanes-Oxley ends up costing companies a lot of money. It is worth noting, he adds, that though five Russian companies are listed in New York, not one has been added since 2004.

There are several observations to make about this comment.  First, Allianz is a very large company, with 703 billion euros under management.  Could it really be the case that a company this large decided to delist because of the marginal costs associated with SOX?  Highly unlikely.

Second, Niederaus notes in his own remarks that 70 Chinese companies have listed on the NYSE.  These companies did not have to turn to the NYSE.  If they merely wanted a presence outside of China, they could have listed on the London Stock Exchange (LSE).  One reason they likely chose to list in the US is that the NYSE has a much tougher set of corporate disclosure and corporate governance requirements.  Because of these stricter requirements, investors in China know that companies listing on the NYSE are the best and safest.  As a result, they attract more investors and their share prices undergo a commensurate increase.  It has long been empirically demonstrated that foreign companies listing in their home market and on the NYSE see a statistically significant increase in share prices.  The same is not true for the LSE. 

In other words, SOX helped the NYSE get those 70 Chinese companies.  Regulations can go too far but in this case, the US (and the NYSE) benefited from the higher bar rather than the lower one that Niederauer seems to want.

Full post as published by The Race to the Bottom on December 29, 2009 (boomark / email).