I see that financiers have noticed that there's been a 12.4% increase in de-listings of foreign companies on US exchanges. The explanation appears to be either "a pent up demand to leave the US" or "the increasing unattractiveness of the US capital markets".
Not only are these symptoms not causes, I'm not sure they're really very helpful. I'm not even sure they show the true scale of the effect. The flight from the US markets has been happening for much more than twelve months. It started when Sarbanes Oxley
(SOX) first hit the streets to try to regulate good governance and deter fraudulent activity by hitting the board room.
While most believe that SOX was (and is) an over-reaction to the scale of the problem (notably, those who lost money didn't think it was an over-reaction), the fact is that the cost of complying with SOX is enormous. To anyone outside the industry, most
of SOX would seem to be common sense. You have to have strong controls on the processes and structures in your firm (who would want weak ones?), you have to have communications in place so that any issue gets caught identified and moved up the management
chain in a (and I quote) "timely manner". Finally, you have to have educative protective processes and controls in place so that everyone understands the importance of the issues and resolves them.
But why would foreign firms worry about all this? They aren't subject to SOX because they're not US firms are they? - wrong. Any firm, from any country, that trades its shares on a US exchange is directly subject to SOX. Whats less well publicised is
that the audit firms of those corporates are also subject to SOX and increasingly those who are directly affected by SOX are requiring those NOT affected, wherever they are in the world, to meet the same standards just to make sure there is no "infection"
by sloppy practices in the supply chain. For supply chain remember to include banks, paying agents, depositaries, brokers etc.
The net (and very sad) result is that many firms that wanted to access the size and liquidity in the US capital markets have found that the cost of doing so outweighs the expected benefits in a way that most of us would say was "to be expected". I guess
some could also be de-listing because the penalty for breach hits first at the director's doors - personally. Are all those companies de-listing because they have something to hide? Of course not. But equally when you get past the verbiage of the regulations,
you find some pretty basic, common sense rules of the game that we'd expect any business to be able to meet if we were going to trade with them personally.
We should also take note of the fact that the number of securities class action filings has steadily been decreasing since SOX, presumably either because firms are getting their governance straight or because the fraudsters in the board rooms are getting
smarter. Lets just hope there's nothing festering in the sub-prime fiasco that leads to another spike in claims because while Enron and the like were "relatively" constrained in scope, the scale of global losses due to the US sub-prime situation, if it resulted
in class actions, could make Enron look like a firecracker compared to a Titan II rocket.
Of course, the financial services world is no stranger to over-zealous regulation and to some extent you can see why regulators would prefer to be over-prescriptive given the propensity of some parts of the industry to find "alternative" ways of making a
dollar. They push back in one place, so the industry finds another route. Regulators are naturally going to take a very broad approach.
As other countries are developing SOX look alikes (including even the name in some cases e.g. JSOX), running from one country to another when the cost of controlling and understanding your business gets too tough, isn't going to be a viable option. You'll
run out of countries for a start!
In the most, this affects what we in the financial services sector would call "corporates". The question for the financial services sector is how to interact with these corporates in such a way as to help them comply with good governance. After all, they
are the engine that drives much of what we do in corporate actions.
I've already run several courses on SOX for a number of financial firms this year, so its encouraging to see an acceptance of the role we all play, but also of the likelihood that financial services firms themselves will have to comply either because they
are a supply chain link or because they have their shares traded in ADR form.
Everyone looks to technology these days as the panacea for all ills, particularly regulatory ills. But with firms still reeling from projected (and actual) costs for MiFiD, Basel and US1441 and the like, is there much appetite for a technology solution?
Indeed, is there such a solution? I've seen a few so far but most only deal with one or two parts of the regulations and where there's a gap, there's a risk.
I wrote a book with Terry Sheppey back in 2005 (Publ. Palgrave Macmillan) which compared and contrasted over 24 sets of global regulation and how they affect financial services firms in an attempt to find and document the overlaps which could cause unecessary
cost or exacerbate risk. They weren't difficult. What was surprising was finding so many firms that had such a siloed approach to regulatory compliance that weren't seeing the same thing. They were (i) spending too much, (ii) missing areas of overlap that
create risk and (iii) so inundated with changes that they were increasingly unable to keep up, which = risk.
Sarbanes Oxley was and is a critical factor in all this because its fundamental to us all. The disinvestment rate of foreign corporates from the US is related to our own issues of meeting increasingly complex regulatory constraints. So I think the financier's
reasoning, while valid, needs our attention at a more granular level if we're to get anything useful from it.
Ultimately however, there's no escape from this particular type of regulation because it makes sense and its the right thing to do. It may be delivered over-zealously and we may react to it badly, but essentially, we'll all have to keep our SOX on in bed!