SOX and the Times (LA Times, That Is)

On Monday, there was a nice article in the LA Times addressing the arguments used by those who blame SOX for the decline in US competitiveness.  Those antagonistic towards SOX would have the US adopt lower standards as a means of competing.  The quote at the end of the article took on that approach:

• "The U.S. has actually prided itself on having the toughest regulations in the world … and along with that, we were always thought of as the Mercedes-Benz of financial markets," said Richard Bernstein, chief investment strategist for Merrill Lynch. "My fear is that instead of maintaining our Mercedes-Benz cachet, maybe we decided that we want to be just a run-of-the-mill sedan. I don't think that's right."

Those who argue most vociferously against SOX may well be suggesting a path that will in fact do the most long term damage to the competitiveness of the US financial markets.

Comments

[M. Hodak]

Mr. Bernstein's opinion is Mr. Bernstein's opinion. Mercedes makes a nice car, but that doesn't make them a good company. If we were to use a carmaker analogy, I suggest we make the proper comparison.

GM makes operating policy from the top down. Whenever something goes wrong, they develop a policy designed to prevent similar mistakes in the future. It's basically a CYA mechanism. These policies have accumulated over the years, and are rarely put to a market test; that's not their purpose. GM's management policies, if they were to be put into a single tome, would be a very hefty volume (or two or three). GM is among the most bureaucratic organizations on earth.

Toyota actually has it's operating policies in one thin volume--the TPS manual. It's more of a description of processes for developing, modifying, and pruning operating policies from the ground up rather than the policies themselves. And Toyota takes pruning seriously. Excess managerial processes are as serious a sin of waste as excess work-in-process inventory. TPS effectively, continuously ties this pruning mechanism to a market test. Needless to say, Toyota is the best run auto company on Earth, not necessarily from a perspective of having the "best rules" but from the perspective of being the most efficient rule-maker (and automaker).

If rules are being put in place on behalf of the shareholders, then we should not lose sight of what the shareholders ultimately care about. Sure they want their agency costs under control, but ultimately they want value creation. Too many rules undermines value, not just because of compliance costs, but because a system that has no pruning mechanism ground in a market test invariably overproduces rules. Welcome to the Congress and SEC.

The view of corporate governance as the rules by which corporations should run themselves clearly manifests itself in the accumulating regulations adopted by our government in specifying in ever greater detail how a company should be governed. You clearly view the opposite of this mechanism--jurisdictional competition--as a race to the bottom. But where is the market test for the most efficient governance when one-size-fits-all becomes the way we do things?

Actually, the U.S. has not had the "toughest regulations in the world" for quite some time. Germany, the home of Mercedes, has much tougher rules than us, and almost no international firms list in Germany if they have a choice. Even Mercedes (Daimler Chrysler) is listed on the NYSE rather than Frankfurt since the Chrysler merger.