U.S. Companies Still Need Innovation Despite Regulation
WASHINGTON, Oct. 5 – The real challenge to the United States isn’t terrorism but maintaining a competitive position in the growing global market, Sen. Chuck Hagel (R-Neb.), chairman of the Senate banking subcommittee on securities and investment, said Wednesday.
The senator spoke as a part of a panel hosted by U.S. News & World Report magazine on whether the Sarbanes-Oxley Act has restored investor confidence since it was enacted in 2002.
Hailed as the most significant change to the country’s securities law since the New Deal in the 1930s, Sarbanes-Oxley was designed to protect investors by improving the reliability and accuracy of corporate disclosures. The Public Company Accounting Oversight Board was created as a result of the act.
Hagel said regulations like the Sarbanes-Oxley, while not intending to foster a risk-free corporate culture, could restrict innovation and growth.
The panelists-William J. McDonough, chairman of the Accounting Oversight Board; John J. Castellani, president of the Business Roundtable; Alyssa Machold Ellsworth, managing director of the Council of Institutional Investors; and Hagel-agreed that the act has made strides in improving transparency in financial disclosure, a needed measure after the Enron, WorldCom and Tyco scandals.
As a result, however, some companies are already risk averse, McDonough said. The question to think about, he said, is “How do we keep the virtue of Sarbanes-Oxley and have business leaders keep taking risks?”
As with any new routine, said Ellsworth, company executives are adjusting to their new roles, and striking a balance will come with time.
“This is the most vibrant market in the world,” she said.
Sarbanes-Oxley has been very effective for larger companies that have developed compliance oversight boards and have had long-standing relationships with auditors, McDonough said. But for others, compliance regulations haven’t been cost-effective, he said.
The panelists recommended that Congress should consider legislation to make the act more manageable for small-to-mid size companies that don’t have ample resources to comply with the paperwork and labor-intensive requirements.
Clear disclosure of chief executives’ compensation, was another hot button, especially for investors. Though the law requires disclosure of compensation, critics say companies are sometimes vague on the details.
“Shareholders see red on this issue,” Ellsworth said.
Agreeing with other panelists, Castellani said compensation shouldn’t be legislated but industry guidelines should be drawn up so investors can understand how CEOs are paid.
He said that salaries should be linked to long-term performance, determined by independent company committees and that executives shouldn’t be rewarded for underperformance.
Changes to the legislation won’t come any time soon though, Hagel said, adding that it falls low on a list of congressional priorities that include Hurricane Katrina relief.
“It is important to let [the Securities and Exchange Commission and the Public Company Accounting Oversight Board] play this out,” he said. “We have to be careful that Congress doesn’t regulate the regulators.”
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