17 The likelihood of the EU requiring annual governance statements is high- lighted by the EU’s 2003 Action Plan, expected to be phased in over the next few years. PUBLIC POLICY AS AN ENABLER OR INHIBITOR OF ENTREPRENEURSHIP 247
SILVER LININGS Despite the many significant constraints that have been documented through- out this chapter, it is possible to consider several silver linings to the cloud of SOX. As Marshall Sonenshine, chairperson of investment bank Soneshine Part- ners, observes, ‘‘We’re seeing the changed climate as a disciplining process. It doesn’t stop good deals from getting done, but it does create a greater level of accountability and confidence.’’ 18 This higher level of scrutiny may well be the most significantly positive outcome of SOX. Despite the general lack of aware- ness of the issue (80 percent of our respondents were neutral on this topic), 75 percent of companies subject to fraud allegations from 1998 to 2003 had market caps less than US$700 million and 40 percent had market caps less than US$100 million. Similarly, proxy advisory firm Glass Lewis found that compa- nies with annual revenues less than US$100 million restated earnings in 2004 at more than twice the rate of the largest companies. 19 Consistent with this re- sponse, 42 percent of our respondents believed that SOX would result in more companies being de-listed (versus 46 percent neutral) due to fraudulent re- porting. If this occurs, the protective value of SOX compliance will have achieved its initial goals. Additionally, the majority of our sample agrees that the SOX compliance requirements provide companies the opportunity to look for existing weaknesses and shore up for new growth. In contrast, however, a slight majority does not see this process of internal scrutiny as a factor in keeping operations nimble and flexible. Despite all the negative reactions, at base, there is a perhaps grudging level of agreement that SOX-mandated improvements in systems and processes will introduce a higher level of discipline, which in turn, will provide growing companies more options, whether they choose to go public, stay pri- vate, or seek to become acquired. That there may be a silver lining is growing in awareness, at least among big company CEOS, as a recent Wall Street Journal article notes, ‘‘But get them away from the locker room and many big company CEOs will admit the law has done more good than harm. Some will even admit that the much maligned 404 has led them to make needed improvement in internal controls.’’ 20 CONCLUSION AND OPPORTUNITIES We are at a time of unusual congruence of political risk, legal risk, and business risk, fraught with multiple levels of regulations at the federal, exchange, and ultimately, the state levels. It is this confluence of SOX, FASB, the litigation environment, and the attitude of the SEC, which make the situation untenable as applied to companies of all sizes. Here too, a majority of our respondents identified concerns that SOX would expand beyond its original intent into state and local regulations. If this were to happen, the acquisition process would be-
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