has an interesting take on the failure of the payroll survey numbers to rise as many expected. It places part of the blame on Sarbanes-Oxley:
In the first weeks of 2004, just when nearly all figures indicated the economy finally was moving full-speed ahead, the government released a job-growth report that many took as disappointing. Just 1,000 new jobs had been netted in the month of December, according to the Department of Labor's survey of nonfarm payrolls. [...]
The job numbers did not come as that much of a surprise to many who follow small business, specifically small entrepreneurial public companies. These observers said legislation promoted to stop corporate abuses at companies such as Enron and Worldcom has burdened business generally, and new entrants particularly, with mounds of costly and complicated red tape.
"In Congress' passion to do something about Enron-like situations, once again small businesses got financially hammered," says Jack Wynn, president of the National Small Public Company Leadership Council. Citing the Small Business Administration, Wynn tells Insight that small businesses create 73 percent of new jobs. "You're not going to have job growth without small businesses," he says. "If small businesses are overburdened by regulation, it's no surprise they're not creating jobs." [...]
Today, Oxley and his staff still stand by the law, even though an AMR Research survey found that compliance costs will be $5.5 billion this year. [...]
When Bush signed the bill at a Rose Garden ceremony in 2002, he gave it an odd form of praise for a conservative, saying it contained "the most far-reaching reforms of American business practices since the New Deal." Indeed it is far reaching, and it is costing businesses billions of dollars with very little benefit to shareholders, a growing number of critics say. Agreeing with Wynn on the impact to small business and the economy in general, Brian Wesbury, chief economist of the Chicago brokerage firm Griffin, Kubik, Stephens & Thompson, tells Insight, "It is a drag on the economy, and therefore over time we will not create as many jobs as we would otherwise."
Sarbanes-Oxley goes where the federal government has never gone before in securities regulation, not just prohibiting conduct but prescriptively mandating the duties of certain employees and board members, designing the structure of boards of directors, and dictating one-size-fits-all processes for testing internal controls for nearly all public companies. It also is displacing the traditional role of states in regulating corporate governance and may signal what University of California-Los Angeles law professor Stephen Bainbridge has called in Regulation magazine, "The creeping federalization of corporate law." [...]
Encouraged by Sarbanes-Oxley and the SEC, the New York Stock Exchange and the NASDAQ stock market have proposed that boards have a majority of independent directors. Yet the data does not bear out the theory that companies with boards made up of strong independent directors will look out more for shareholders' interests. "The quantitative research done to date is inconclusive at best," reports Strategy+Business, the journal of the management consulting firm Booz Allen Hamilton. The journal reported that a large-sample study by professors from Stanford Law School and the University of Colorado found that "firms with more-independent boards are not more profitable; indeed, there were hints in the data that they perform worse than other firms."
One firm that ranks badly in a corporate-governance model is the holding company Berkshire Hathaway, which has a board that includes the wife and a son of legendary CEO Warren Buffet. Yet shareholders don't seem to mind that much, notes Alan Reynolds, senior fellow at the libertarian Cato Institute. "It fails all the independent-director tests, but boy would you sure like to own the stock over the last few years," he says.
And, ironically, one firm that would have been able to comply almost perfectly with the Sarbanes-Oxley "independence" requirements was Enron. Indeed, 86 percent of its board was independent, and its audit committee was chaired by a former dean of the Stanford Business School and professor of accounting there. Yet when the scandals broke, the professor claimed he didn't understand the complex audits of Enron and Arthur Andersen. [...]
What the new audit requirements are doing, Rodgers says, is greatly reducing the productive time he can spend with the board to discuss ways to grow the business. Lawyers advise him that because of the law's prohibitions of CEO influence over the audits he shouldn't even be in the room when the audit committee meets. "Big Brother has decided actually to micromanage the meeting schedule for the board, so now I lose a half-hour of board time, which is absolutely critical to me because my board is very active, very intelligent and, by the way, doesn't agree with me on a lot of things. They're certainly not a rubber-stamp board."
With the new mandated responsibilities of board members, directors' fees have doubled, according to a survey of 32 midsized companies by the law firm Foley & Lardner. The survey also found that accounting, audit and legal fees also doubled under Sarbanes-Oxley, and the costs of directors' liability insurance skyrocketed from $329,000 to $639,000. Moreover, the average price of being a public firm nearly doubled from $1.3 million to almost $2.5 million. For businesses such as Cypress this is costly, but for small businesses it could be prohibitive. Just finding an independent director can be difficult, Wynn says. [...]
But the Competitive Enterprise Institute's Smith says the one-size-fits-all rule is as silly as it is expensive. Investors already know that a small public company usually carries more risk than a "blue-chip" firm. The law's proponents "want a world of investment with no risk," Smith says.
Yet it was risk-taking entrepreneurial companies such as Microsoft, which were able to get access to public capital when they were small, that fueled the boom of the 1980s and 1990s. [...]
But Sarbanes-Oxley is creating some jobs, Wesbury points out. The requirements for specific internal-control processes and 48-hour disclosure of any "material information" have been a boon for software builders, consulting firms and, ironically, the very Big Four accounting firms that were blamed for the corporate scandals. "Despite what all my friends in those businesses tell me, overall those are nonproductive jobs," Wesbury says.
Yes, and those are exactly the kind of jobs you don't want to create. The number of tax accountants employed per company could also be used a a metric of regulation imposed waste on the private sector.