Over the past year, corporate governance has become a phrase that is bandied about by all and is sending shivers down the spines of corporate executives worldwide. Sarbanes-Oxley is the piece of legislation that most large companies are worried about – it was intended to improve the transparency with which public companies in the US conduct their businesses, but even private companies in the US are feeling pressure to comply with its requirements.
And they are not the only ones. In Europe, growing resentment at the unwanted pressure being forced on Europe’s businesses is persuading some firms to take drastic action, with some even threatening to de-list from US stock exchanges. But this may not solve all of their problems, since companies with 300 or more shareholders in the US are also bound by the requirements of Sarbanes-Oxley and, as rules governing shareholding by US individuals and firms have been loosened recently, firms no longer need to have a presence on the US stock exchanges to generate a significant US shareholder base.
According to estimates made by PricewaterhouseCoopers, there are 470 non-US companies listed on the New York Stock Exchange, with a combined market capitalisation of $3.8 trillion – or 30 per cent of the total value of capitalisation of companies quoted on the exchange. However, the costs of maintaining a US listing are high and, combined with the costs of complying with the requirements of Sarbanes-Oxley, are making some firms question whether the cost of maintaining a US listing now outweigh its benefits.
For example, German chemicals producer BASF estimates that the extra costs of Sarbanes-Oxley compliance are somewhere between $30m -$40m per year. International companies used to list their shares on US stock exchanges to show how strong an international player they were, to get access to a wider pool of investors and to gain easier access to potential acquisitions; many feel that these are now not worth the cost. Other household names that have been quoted in the press recently as saying that they were at least considering de-listing include the Rank Entertainment Group and British Telecom from the UK.
At the beginning of 2004, before many realised just how much of a burden Sarbanes-Oxley compliance would be, a survey by Financial Executives International estimated that the average cost for individual companies would be around $2m. However, it had already upped its estimates to $3m by July 2004. A separate survey conducted by Korn/Ferry during 2004 put the average cost of compliance at $5.1 million. In total, Korn/Ferry put the total cost for US businesses alone of Sarbanes-Oxley compliance at more than $5bn per year.
The prescriptive nature of the demands also rankle with European companies. In the UK, the combined code on corporate governance that was updated in 2003 uses a ‘comply or explain’ approach, realising that one set of rules cannot be universally applied across all companies. This is something that Europeans find much easier to swallow.
In addition, strict data protection laws in Europe may make compliance with Sarbanes-Oxley actually in breach of the Data Protection Act of 1998. For example, the UK’s Institute of Chartered Accountants states that UK companies which complete item 8.1 of the registration form for Sarbanes-Oxley – agreeing to provide information at any time in the future – are abusing data protection rights. In the UK, companies must get consent from employees to disclose certain items of information, bu they cannot be sure that the consent will be given. According to PricewaterhouseCoopers, the transfer of information requested to the US - where data protection laws are not as strong as in Europe - will make a firm automatically breach the data protection act.
The EU appears to have stepped back from imposing a blanket form of Sarbanes-Oxley across all member states and prefers to let individual countries put their own legislation in place. However, Frits Bolkenstein, the EU commissioner for the internal market, has put forward a number of proposals for improving corporate governance. These include bolstering auditors’ independence, tackling off-balance sheet financing, providing greater transparency into executive pay and forcing companies to make statements about the standards of corporate governance used in their firms.
In the light of the money that companies have already spent on Sarbanes-Oxley compliance, this appears to be a better way to move forward.