Dirty SOX

Any time the lawyers posing as congressional representatives make a move to "reform" the way we live and do business, they make the cure much more painful than the illness. Every time they act in knee-jerk style, it is the multitudes of innocent who are punished for the crimes of the very few.

From IBD:
Posted 5/25/2006

Scandal: The Enron saga has ended, as expected, with the convictions of both founder Ken Lay and former CEO Jeffrey Skilling for conspiracy and wire fraud. But America will live with this mess for a long time.

Of course there's the immediate impact of Enron itself. Once one of the nation's most powerful companies, the energy giant collapsed virtually overnight after its top executives were charged with a series of financial crimes.

In direct, immediate costs, Enron's 2001 demise destroyed some $60 billion in stock market value and 5,600 high-paying jobs — not to mention billions in 401(k) pension savings by its workers.

But Enron was really only the last in a long line of 1990s corporate scandals that included WorldCom Inc., Adelphia Communications and Martha Stewart, among others. Along with the convictions of top executives, the scandals kicked off a new era of stringent corporate regulation, most prominently the Sarbanes-Oxley act.

But sadly, while Lay, Skilling and others who committed crimes will go away, the impact of Congress and Sarbanes-Oxley will be with us for decades to come.

As it often does, Congress overreacted to perceived rampant criminality. The result was Sarbanes-Oxley, a law that, at best, is bad, and at worst, a disaster.

SOX, as some call it, was rushed through Congress. Today, it's the law of the land — and companies large and small pay for its flaws.

And when we say "pay," we mean "pay." The costs — in added corporate reporting and monitoring, in requiring hundreds of executives to focus exclusively on complying with the complex new law, in lost opportunities, in new accounting rules — are immense.

The most wide-ranging and thorough study, by economist Ivy Zhang, estimated that American shareholders took $1.4 trillion in market losses due to Sarbanes-Oxley. That massive loss doesn't show up in companies' income statements and no one in Congress today talks about it — but it's real nonetheless.

Direct costs are somewhat less, but at least you can actually see those: About $6 billion a year, according to a study by American Enterprise Institute economists Henry Butler and Larry Ribstein.

Companies, especially small ones, feel the pain most. A study by CFO Magazine estimated businesses with as few as 250 people could be hammered with $500,000 a year in added costs — a huge hit for small firms that may help explain why job creation in 2002 and 2003, Sarbanes-Oxley's first years, was so slow.

This is the law of unintended consequences, writ large. Congress created tough new rules in response to scandals. But in attempting to undo the damage of the misdeeds, it created far more damage.

Sarbanes-Oxley is, in large part, a big reason why the stock market has underperformed in recent years, despite big gains in corporate profits. It might have had some good parts, but today, most companies think it's a disaster. Scrap it and start over.