The ethos of SOX is rapidly spreading around the world
It is possibly one of the most famous last names in corporate governance: Oxley. Along with Senator Paul Sarbanes, Michael Oxley authored one of the most significant corporate regulatory documents in history, the Sarbanes-Oxley Act. There is no doubt that this 2002 work has been the preeminent focus of almost every listed company in the US since its inception. Just as the last listed companies are about to comply with SOX, most big firms are becoming comfortable with it. So what is Oxley doing now? He is no longer a congressman. In a move that surprised some observers, he has taken up the position of vice chairman at the NASDAQ OMX Group.
Why NASDAQ? As Oxley explains, it’s as if he was almost destined from an early age to work at the exchange. ‘In some respects I have been with NASDAQ since I was about seven years old,’ he recalls. ‘When I was growing up in Findlay, Ohio, a gentleman by the name of Gordon Macklin came to Findlay with McDonald & Co, a brokerage firm out of Cleveland. He opened up a one-man brokerage and later formed the National Association of Securities Dealers in 1951. Even at that time, he always had this vision of an all-electronic market.’
When Oxley won a seat in Congress in 1981, 10 years after NASDAQ was founded, he reconnected with Macklin, ‘who was basically the father of NASDAQ’. Macklin still had the ‘all-electronic’ mantra; ‘we talked about it a number of times, and I guess it was always in the back of my mind,’ Oxley says.
Path to the future
Oxley was soon appointed chairman of the subcommittee on financial markets in the commerce committee. ‘My first initiative was to change the way stocks were listed from fractions to decimals. NASDAQ was very supportive of this, and it saved investors billions of dollars. The NYSE was vehemently against the change and basically tried to protect the status quo and the NYSE’s traders and specialists. It marked, to me, a clear contrast between the past and the future, and I believe this is still the case today.’
One of the important elements Oxley offers to NASDAQ is his experience on Capitol Hill. ‘Part of our initiative is working on the Hill on public policy issues. We are working with the SEC and Congress to move forward on initiatives that are for the benefit of listed companies and NASDAQ but also for the general betterment of the economy as a whole,’ Oxley explains.
When he isn’t marching the halls with his former colleagues in DC or at his day job at Cleveland-based law firm Baker Hostetler, Oxley is traveling the world preaching the governance (and occasionally NASDAQ) gospel. In the past 18 months he has visited all the BRIC countries (Brazil, Russia, India and China) to discuss regulatory and business issues.
‘A lot of the companies that we meet with are for the most part satisfied with being listed on NASDAQ and in the US. They like the certainty and stability, and the access to a deep pool of capital,’ Oxley explains. ‘While they recognize they have to raise their standards, and the rules and regulations are relatively tough, they feel in the long run that it benefits them with the investing public.’
A rapid state of change
While the regulatory environment has changed significantly in the US in recent years, the pace of change within other countries has been even more rapid. ‘There have been significant advancements in the past few years, particularly among the European market space and countries like Japan,’ Oxley says. ‘But that does not mean every company is up to speed. Some companies are obviously not fully ready for listing on NASDAQ or any other US exchange and that is exactly why we have the 144a program, which has been extremely successful and continues to grow.
‘I think with our acquisition of OMX and with the Dubai investment, we have really moved toward greater consolidation and globalization that puts NASDAQ on six continents and provides the kind of exposure for these listings that they heretofore did not have,’ Oxley continues. ‘As we start to assimilate OMX and the Boston and Philly stock exchanges, I think those synergies will be more evident and the benefits to our listed companies and the market will be pretty obvious.’
Of course, one of the biggest challenges in today’s global market is dealing with a variety of regulatory and cultural approaches. ‘I think we are starting to see some very good progress in this area,’ Oxley says. ‘For example, the recent agreement with the Europeans on recognition of IFRS is a big advantage, particularly for international companies. The need to find common ground with regulators and exchanges, particularly in Europe, is obvious.
‘We are seeing a globalization and democratization of the markets, with more and more people being involved all over the world. This, paired with a consolidation of exchanges, is leading to inevitable progress. How NASDAQ manages that is really going to be key to our success, and to the success of our
‘There is no question that there are some significant cultural differences, but the advantages are so big that they keep us all moving in the right direction,’ Oxley continues. ‘There are critics of the adoption of international accounting standards vis-à-vis US GAAP because they think that it weakens our regulations and post-Enron advancements, but you have to balance that against the need to find some common ground in this regulatory structure as we continue to see an increase in commerce and trading between EU countries and the US. This is in all of our best interests, but no one said it was going to be easy.’
One of the biggest challenges in the developing markets is a lack of transparency. This is illustrated well by the BP joint venture in Russia. If corruption is unchecked and there is little disclosure or accountability, companies will not feel safe investing. This is especially so if, as with BP, the government comes in and seizes assets if it feels the need to. Of 150 countries, Transparency International rates only a dozen with lower transparency scores than Russia. ‘Russia is doing fairly well at the moment, but going forward it is going to have to be careful and make advancements in transparency. Otherwise the direct foreign investment is going to go somewhere else,’ Oxley cautions.
Sovereign wealth funds (SWFs) are another segment of the international marketplace that has been cause for considerable rumor mongering and concern.
But Oxley thinks that, in general, SWFs positively influence the markets: ‘I think that in the case of NASDAQ, with the Dubai investment [a Dubai investment vehicle owns 19 percent of the exchange], it was a very favorable thing. Also, I think these SWFs have saved a lot of the banks on Wall Street with significant cash investments. There will inevitably be discussions and debates about the need for more openness and transparency [by SWFs]. I think this is totally reasonable, but for the most part the SWFs have been a real godsend for many of the banks. In terms of NASDAQ it gave us a footprint in the Middle East and Africa that we had never had before.
‘The fear mongers,’ he continues, ‘have been proven wrong time and time again, and the SWFs will continue to be a major bulwark against failure in some of these markets and in the long run will have great potential for economic growth, job creation and all the other good things that we like to talk about.’
Competition is natural
Not everyone is happy, however. Duncan Niederauer, CEO of NYSE, recently called for a relaxing of SOX for small- and mid-cap companies. He suggests that the rules are overly restrictive on small business and that SOX is discouraging companies, both domestic and foreign, from listing on the exchange.
‘The SEC has addressed this, so I don’t think there is much use to it,’ Oxley comments. ‘Overall I think it is having positive consequences and the SEC has delayed implementation for the smallest companies for many years now until they could be sure that the cost-benefit ratio would be in line. It certainly seems that the initial figures indicate that the costs are pretty reasonable and ultimately this will help to boost companies’ market cap because investors will be able to be confident that each company is on an even keel.’
Oxley does not believe that the stricter regulatory situation in the US is discouraging new listings. ‘What is really happening is that we have a global economy; there is competition and a maturation of exchanges all over the world. Why would we not expect a globalization to take place in the capital markets just as it has in many other markets?’ he asks.
‘We have been preaching the values of capitalism since at least the end of World War II and now, when other countries have the capability of having a dynamic market system, we wring our hands about how the end of the world is here and how New York is no longer the financial capital of the world. It is a natural consequence of things, and we are going to have to respond and compete with others for listings. For the most part this is good for everybody, especially the investing public,’ Oxley concludes.
Going forward, one of the biggest issues that will necessarily have to be faced will be refining the structure under which companies and markets are monitored and regulated. ‘The plan that Paulson came up with in terms of the regulatory structure really does need to be addressed,’ Oxley asserts. ‘There is no question that our current regulatory structure in the US is from the early 20th century, and we are now in the 21st century. We need major changes in that direction and we need to take a solid look at how we can make things work better for all stakeholders. This is going to take a long time, and I applaud the administration in the Treasury for having the foresight and courage to step forward with this. There is a long way to go, and what we are seeing now is just the beginning of the process.’
The idea of reform and change is inevitable, and it is hard to argue that we can continue to rely on a 1930s paradigm in this modern world.
