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March 6, 2006

A Former Fan Turns On Sarbanes-Oxley

Bob Greifeld, president and CEO of Nasdaq, writes in today's Wall Street Journal (page A14 of the print edition):

I have been a sometimes lonely but consistent supporter of the principles of Sarbanes-Oxley, despite the crescendo of corporate criticism it has engendered. I have supported SOX for two basic reasons. First, it is a tough but essential step toward restoring investor confidence through greater transparency, accountability and improved corporate governance. Second, based on our experience at Nasdaq, I was convinced that, after the initial legislative shock wore off -- particularly regarding the costs of Section 404 -- that the benefits of SOX would prove compelling and unassailable. I expected that its onerous reputation would diminish with time.

I was dead wrong on the second point. Anguish over SOX in this country is not abating; if anything, sentiment has hardened and the perception gap abroad is now wider than ever. As the CEO of a U.S. stock market, I am in frequent contact with a broad spectrum of business leaders, many of whom list on our exchange. When it comes to SOX, their message is clear: The burden of compliance is onerous, the cost is significant, and it falls disproportionately on smaller companies that are least able to pay. Our research has shown that the burden on small companies, on a percentage of revenue basis, is 11 times that of large companies.

This reaction seems like a particularly bad signal:

In my travels to countries like China, India and Israel, I meet with the new generation of international entrepreneurs who are building businesses and dreaming of the day they can take their companies public. The constant refrain I hear is that when it comes time to do an IPO, they will be reluctant to list on American markets. They will look elsewhere to raise capital, and the main reason they cite is SOX.

The culprit according to Mr. Greifeld is, not surprisingly, the infamous section 404:

SOX is important; by and large, it works. We have had three years to assess its strengths and problems. Perhaps 90% of complaints have their genesis in 20 lines of text. We lay the widespread misperception about the cost and difficulty of compliance at the feet of the famous Section 404. So the time has come to address those 404 concerns without diluting the essential investor protections that are the true legacy of SOX. Specifically, we should adopt the recommendations of the SEC's Advisory Committee on Smaller Public Companies, which has proposed an exemption from 404 for companies with less than $128 million in market cap and revenues under $125 million. Companies with up to $787 million in market cap, as long as they had revenues less than $250 million, would receive partial exemption. The companies exempted account for only 6% of U.S. market cap, which means 404 would still apply fully to 94% of equity market capitalization.

Nasdaq strongly supports the committee proposals for smaller public companies.

I've often wondered how much Sarbanes-Oxley, section 404 specifically, has to do with this picture (updated from past posts):



I wonder about one more thing.  How much of the historically high cash-flow to investment ratio is accounted for by the 6% of businesses that the Nasdaq folks would not exempt from 404.