The New York Stock Exchange’s proposed merger with Paris-based Euronext, which runs four electronic stock exchanges in Europe, may seem like positive news for New York’s economy. Wouldn’t it be great for Gotham to have the world’s first global stock exchange headquartered right on Wall Street, as the NYSE intends? But in fact one of the NYSE’s key reasons for initiating the merger carries troubling implications for New York’s economic future.
Many corporate executives, particularly those heading up-and-coming entrepreneurial companies at home and abroad, now consider the New York market an obsolete place to do business, and they are flocking to exchanges in Europe instead. In 2005, the NYSE and the Nasdaq won only 28 new international listings, a modest 16 percent increase from the year before; by contrast, the two major European exchanges, the London and the Luxembourg Stock Exchanges, won 50 listings between them, more than double their new listings in 2004. The NYSE is reaching across the Atlantic just to stay competitive.
Europe is winning business that once went automatically to New York largely because companies find that the burdensome requirements imposed by America’s four-year-old Sarbanes-Oxley law simply aren’t worth the trouble. Sarbanes-Oxley (SOx), enacted in haste by Congress and signed by President Bush just months after Enron’s 2001 demise shook the financial markets, requires companies to jump through numerous hoops each year at the behest of government regulators. Companies of all sizes now must spend millions of extra dollars annually to ensure that they have adequate “internal controls” in place if they want a listing on a U.S.-based stock exchange. The Chicago-based Foley & Lardner law firm has estimated that for medium-sized companies, the “cost of being public” has risen 223 percent since 2002, due to these new rules.
SOx’s purpose is to minimize the risk of improper and inconsistent accounting practices, especially those that some managers employ to smooth over volatile quarterly numbers or to paint a falsely positive picture of their companies to investors. But because regulators haven’t spelled out exactly what they mean by good “internal controls,” company executives must guess, adding massive uncertainty to the cost of doing business. The law also forces companies’ chief financial officers to spend inordinate amounts of time shuffling through bureaucratic paperwork, instead of helping to map corporate strategy.
European and Asian companies that, like the vast majority of their American counterparts, already boasted rational accounting and auditing policies long before SOx understandably aren’t interested in spending all that extra money just to list in New York. And they’re finding plenty of willing investors abroad anyway. “Five years ago, most big companies seeking public financing felt compelled to list their shares in New York. Today, non-U.S. companies are finding markets like London and Hong Kong equal to the capital-raising task,” the Wall Street Journal reported Monday.
Worse, foreign companies aren’t the only firms that SOx deters from listing in New York. According to Wharton prof Christian Leuz, 198 companies delisted from American exchanges in the year after Sarbanes-Oxley went into effect, nearly triple the number the previous year. Among the factors pushing companies to delist: SOx-related costs like “higher audit and legal fees, new internal control systems . . . higher director and officer insurance premiums, and a host of other expenses associated with compliance.”
The NYSE may be trying to buy Euronext in part to encourage smaller and mid-sized American companies to go public in Europe if it’s financially prohibitive for them to do so here. American companies could list their shares abroad to raise capital in euros, and still do business in the U.S. But then they’d need bankers, stock underwriters, and financial advisers in Europe, not in New York.
One New York congressman has grasped how debilitating an unreformed Sarbanes-Oxley will be for New York’s economy. Queens Democrat Gregory Meeks has joined two southern colleagues to propose scaling back SOx as it applies to smaller companies. “We cannot lose our lead in America, and particularly here in New York,” Meeks said Monday, according to the New York Sun. Chuck Schumer, call your office: it’s time for the rest of New York’s congressional delegation to wake up to this crisis in the making, and work with Meeks to fix this law.
As for Mayor Michael Bloomberg: the next time he wants to tell rich New Yorkers how to direct their political contributions, as he did last month when he told them to support national candidates who back New York on such foolish causes as getting more federal money for subsidized “affordable” housing, perhaps he should remember Sarbanes-Oxley.