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Sarbanes-Oxley is Outsourcing U.S. Leadership
by Senator Kay Bailey Hutchison
Published in the Investor's Business Daily April 16, 2007
If there's a single issue that's been underexposed, but is sure to affect your bottom line in the future, it's the federal government's overregulation of capital markets, which, if left unchanged, will jeopardize America's long-term ability to succeed in the global marketplace.
In the aftermath of Enron's spectacular collapse, and a succession of shocking accounting scandals demonstrating gross unethical conduct, Congress passed the Sarbanes-Oxley Act of 2002. This landmark bill was enacted to restore investor confidence in the wake of these abuses by making it much harder for CEOs and their accountants to misrepresent corporate earnings.
Nearly five years after the bill was signed into law, the Sarbanes-Oxley Act, although well intentioned, has also created unexpected and unprecedented costs for the business community — and those costs are spawning a rapid relocation of capital (the lifeblood of prosperity) from the U.S. to other countries.
Since the early 1900s, America has been the global leader of capital formation. A century ago, J.P. Morgan and other capitalist titans moved their offices from London to the U.S to recognize this achievement. Now they're moving back to London — a city that successfully advertises itself as a "Sarbanes-Oxley-free zone."
According to the American Enterprise Institute, the costs of the Sarbanes-Oxley law are north of $1.1 trillion. If accurate, this amounts to an 8% or 9% tax on every good and service produced in the U.S. — a tax that is inevitably passed on to consumers like you and me. This burden is why numerous American companies are choosing to relist their companies overseas.
In the past few years, the statistical evidence for this capital flight has become undeniable. In 2001, the year before Sarbanes-Oxley was passed, half of the dollars raised in global IPOs were raised on a U.S. exchange. By 2005, that amount had shrunk to only 5%. During the same year, the New York Stock Exchange had only six new foreign listings, but the London Stock Exchange had a whopping 129.
These events have helped fuel Europe's stock market, which earlier this month eclipsed the U.S. in stock market value for the first time since World War I. In a very real sense, we are in the process of outsourcing America's lead in world capital markets.
In newspapers and magazines, we often hear about the importance of "knowledge and innovation" in the 21st century economy. These components are certainly vital for future success, but their impact is minimized without a third component, which is capital. The best minds in the world can create the best inventions in history, but unless they're conjoined with capital, they'll sit idly in a workshop somewhere, instead of being actually used by millions of people around the globe.
That's why I believe that capital is the lifeblood of the American economy, and yet, because of inattention, that lifeblood is being drained and pumped into other nations.
Thankfully, a growing number of Washington policymakers are starting to ring the alarm bells. In November 2006, the Committee on Capital Markets Regulation charged that "the threat to U.S. competitiveness appears to be real and growing" and "there needs to be a better cost-benefit analysis" about the consequences of regulation.
Treasury Secretary Henry Paulson has acknowledged that implementation of the Sarbanes-Oxley law should be revised to save businesses time and money, and former Rep. Mike Oxley — the co-author of the law — recently stated that his legislation was "excessive" and should be reformed to provide "more flexibility for small and medium-sized companies."
In light of these growing concerns, I am using my position as chairman of the Republican Policy Committee to hold hearings on how we can alleviate these burdens to U.S. companies as part of a broader effort to recharge our economic competitiveness. In these hearings, I will also focus on litigation reform to reduce the quantity of job-killing frivolous lawsuits, which accelerate the flight of capital abroad.
President Reagan once joked that government's attitude toward the economy could be summed up as follows: "If it moves, tax it; if it keeps moving, regulate it; and if stops moving, subsidize it."
In the coming weeks and months, I'll do my best to reverse this process so that America can once again be the first choice for global capital markets. If we're serious about remaining the world's economic leader in the 21st century, few issues are in more urgent need of a solution.
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