Taking back the farm

While times are dark for many of America’s workers and businesses, there is little doubt that pent-up demand will unfurl in due course across all aspects of the economy as the credit mess gets cleared away. And amid all the plans to tackle high-profile issues and regenerate the country, one of the first sets of actors out of the blocks is likely to be venture capitalists (VCs); the sector’s visionaries are chomping at the bit to unleash the brood of companies they have been nurturing through the storm.

This seems, right now, an unlikely scenario. Most observers reject early action on new business creation in favor of simply stopping the negative forces at work in the economy. But consider that VCs, by their nature, are fast afoot, well funded and planning for the future. At an early December seaside conference in Half Moon Bay, California, they gathered to consider their business. As the nation stood transfixed by the problems rolling out of world’s markets and the transition between presidents, the venture capitalists calmly reckoned how they will proceed.

‘There are lots of companies ready to go public,’ industry veteran Tim Draper, founder of Draper Fisher Jurvetson, told the group. ‘We have 20 just at my company.’

Draper maintains that they will burst loose after one of the driest spells in recent history for IPOs simply because they can’t be held down forever. But others watching the industry say that there needs to be a big change in Washington first; namely the rewriting, if not wholesale destruction of the Sarbanes-Oxley (SOX) legislation.

Wiping the slate clean
‘It has hog-tied American business,’ declares David Kralik as he lays out the battle plan for a major campaign that he says will push SOX into the public mind with one objective – to decimate it. ‘SOX is broken,’ he declares. ‘We need to start with a clean slate. We support regulation, but we do not support destructive regulation.’

Who is David Kralik? And why should what he says have any effect on deregulation in Washington, especially when the rule-making hounds are baying for the opposite: increased regulation to take control of broken credit markets, financial structures, mortgage markets and choked businesses?

The ‘we’ he speaks of is an organization called American Solutions, put together by none other than Newt Gingrich, the former speaker of the House of Representatives who moved off center stage a few years ago only to refashion himself as a leader of change. While the nation’s kingmakers worked their way through the two years of presidential election warfare, Gingrich and his very well-funded groups have been quietly grinding out other results.

Kralik, many years Gingrich’s junior, has been one of his most effective fighters. And now, he is leading a battle to tear down SOX from the very heartland of the VCs, having set up as American Solutions’ representative in Silicon Valley. He moved there from Washington because, he says, ‘tech executives understand what it takes to make America strong.’

Is this some sort of strange quixotic sideshow, or is there a real potential here? After all, many powerful people have been attacking SOX ever since it was written into the rulebooks.

Kralik and Gingrich co-authored an op-ed piece for the San Francisco Chronicle, which appeared in early November 2008 just a day after the elections. In it, they threw down their gauntlet.

‘The effect of SOX in Silicon Valley has been especially dramatic,’ they wrote. ‘In the second quarter of 2008, there were no public offerings of Silicon Valley venture capital-backed companies, a phenomenon not seen since 1978. In the third quarter of 2008, there was only one. SOX has had a direct effect on venture capital. Indeed, if SOX is not repealed, then we could see Silicon Valley’s status as a hotbed of innovation erode and see more and more of the future invented outside of the United States.’

A history of success
In the midst of reviving America’s economy from its staggering economic blow, Gingrich and company say that this aspect of the future will demand attention. Much like the view that resuscitation comes first and the cost of it is dealt with later, so must there be action based on an understanding that only new businesses will drive future growth.

And that is where the VC firms, Newt Gingrich and his unfolding campaign to kill SOX are firmly focused.

Why should this get anyone’s attention?

‘Look at our ‘Drill Here, Drill Now’ campaign,’ says Kralik. ‘We won.’ He refers to a campaign started in 2007 to ensure that Congress would not renew a ban on oil drilling along the US continental shelf. ‘Bush, Pelosi, Obama, McCain – they all turned around by not getting behind override legislation.’

Skyrocketing oil prices last year, which threatened to tear apart the economy and family budgets nationwide, were a big factor in the reversal of position after environmentalists and their supporters on Capitol Hill had held fast against drilling on the continental shelf. But also at work was the mustering of the new information techniques that got ‘Drill Here, Drill Now’ into the public eye.

The Gingrich machine, well oiled by major contributions and years of inside knowledge, worked the new world of public advocacy with all the tools that wowed America in the hands of Barack Obama’s campaigners. Everything came into play, from grassroots texting and twittering to white papers, YouTube clips, talk radio appearances and sponsorship of scores of community meetings run by local people.

Beneath the screen of the presidential battle, slowly building pressure on Congress and the Bush administration in the midst of national political tussling, Gingrich, Kralik and their organizations moved a mountain. The campaign culminated with the unfurling in front of rolling cameras on the Capitol building steps of a petition carrying 1.7 million names. It demanded Congress step away from a plan to renew the ban on drilling. The wind had already been falling out of the renewal legislation’s sails, and within days, the battle to allow domestic oil drilling was won. Congress voted not to renew the ban.

Kralik says that campaign proved his group’s ability to turn things around, by educating people at the grassroots level.

‘Now, we have launched the ‘Repeal Sarbanes-Oxley’ campaign.’ The op-ed piece in the San Francisco Chronicle was the opening salvo, he continues, saying, ‘We will use the same modern media techniques to raise the issues, and Congress will have to address them.’

The op-ed article brought a round of comments from people who keep an eye on all things SOX. One of them, Larry Ribstein, a University of Illinois corporate law professor, authored a view on his online forum, ‘Ideoblog’. He came right to the point: ‘Although one might think that this is the wrong time to press these arguments, in fact, as Gingrich points out, repeal now makes more sense than ever. SOX is best seen as a tax on entrepreneurs (the difference between regulatory costs and benefits) in difficult times when they most need a break.’

A free shot in the arm
Asked to expand on his blog view, Ribstein provided the following comment: ‘First, given arguments made by me and others against SOX, repeal could be viewed as a multi-billion dollar benefit to entrepreneurs at no taxpayer expense. Second, this isn’t about being against all regulation, but about cost-effective regulation. With the regulatory tsunami coming down the pike, one might easily conclude that there are more cost-effective ways than SOX to get at governance problems. Third, the recent meltdown shows that SOX was ineffective against precisely the sort of buried risk problems it was intended to protect against. So the times are not as inhospitable to SOX repeal as they might seem.’

The San Diego Business Journal published its own op-ed, in which a local corporate governance adviser, Wade Lindenberger, chastised Gingrich for his effort, saying that in fact there are positive aspects to SOX. His position is supported by many groups who say the kinds of reform brought by SOX are in fact best practice and help to both shore up corporate reputation and level the playing field for investors. Indeed, the National Investor Relations Institute has stated that many leading companies were doing all the things that SOX requires as part of their investor outreach.

However, that did not include the kinds of compliance audits that SOX spawned. And that is where the extreme costs come in, which proponents of change complain loudest about. Gingrich and Kralik pointed out in their op-ed that costs went far beyond the SEC’s original estimates of around $91,000 per company, ballooning to multiples of millions of dollars.

They quoted Silicon Valley sources as saying that this, along with other SOX impediments, have been major forces in pushing IPO launch schedules from five years after a company is formed to around 12.

Among the negatives of SOX, they also cited the fact that US companies wishing to go public have been lured overseas, away from the encumbrances of SOX compliance. Kralik said in an interview that London has crowed about its ability to win new offerings from companies looking for international exposure at a time when the NYSE and NASDAQ OMX, according to Draper, ‘are reeling, because SOX has made it almost impossible to go public.’

Draper nevertheless underscores that market forces will prevail despite the current problems. ‘Investment bankers will figure out how to get companies public,’ he told the audience at the Half Moon Bay conference in December. ‘It is just a matter of whether they go public in the US, on AIM (the British small company exchange) or Hong Kong.’

The potential for repeal of SOX is hard to discern. It took Congress 60 years to reverse the Glass-Steagle Act, one of the rare instances where reversal of corporate legislation was even contemplated. Professor Roberta Romano at the Yale Law School noted this fact in a 2005 paper, which referred in its headline to the SOX legislation as ‘quackery’.

The paper reflects her own in-depth research into the topic, which takes the legislation apart piece by piece. She is now at work on a revision to the document. It will bring in recent work she has done on congressional debates and other activity in the intervening years. One intriguing element looks at how regional media in particular latched on to the aspect of SOX repeal which deals with its effects on entrepreneurs, jobs and small business. What is more possible is that some parts of SOX might be reversed rather than the act as a whole.

The indication would be that, especially with today’s huge focus on job creation generally, this aspect of SOX repeal could be an important element in gaining the required political support for action. Romano has noted that it is particularly difficult to change laws passed during a time of perceived emergency. It could be argued that pushing to undo any regulatory law in a time of crisis will be equally difficult.

Nonetheless she may have pinpointed how to do it in her original paper’s closing comments. It is important, she wrote, ‘to work to educate the media, the public, political leaders and agency personnel regarding the reality that Congress committed a public policy blunder in enacting SOX’s corporate governance mandates and that there is a need to rectify the error.’

That sounds like the Gingrich-Kralik plan defined. Kralik is the first one to say this campaign will be another real grind, stating: ‘We have our work cut out for us.’