Down on the Street

No longer can America take for granted its global superiority as a market for capital. Will regulatory reform let it keep up with the pack?

A more radical recommendation, unlikely to be among the changes, would be to limit prosecutions to individuals rather than companies. This would avoid a repeat of the Arthur Andersen debacle, in which the accounting firm was driven out of business after being convicted of obstructing justice in the Enron case, only for the ruling to be overturned last year by the Supreme Court.

Some believe a wide-ranging rethink is needed on accounting standards. America continues to believe that its accounting rules are better than internationally accepted standards, even though studies suggest there is not a lot to choose between them. Foreign firms would be keener to list their shares in New York if they did not have to reconcile their accounts.

Litigation. Many businessmen regard America’s legal system, with its punitive jail terms and class-action lotteries, even less favourably than they view Sarbanes-Oxley. “For foreign companies we’re a jungle,” says a senior regulator. Asian firms, for instance, are still reluctant to risk being sued three years after China Life, an insurer, listed in New York and within days fell victim to a shareholder lawsuit. Most firms involved in mergers in America have to factor possible legal troubles into the costs of the deal, says Dick Langan of Nixon Peabody, a law firm.

By some measures, the worst may have passed—though nobody is betting on it. The tide of post-Enron cases is ebbing. Cornerstone Research reckons there will be some 120 class-action filings this year, down from 179 last year. Aggressive law firms have also come under scrutiny. However, damages have continued to rise, from $1.1 billion in 1999 to $3.5 billion last year (excluding the $6 billion-plus WorldCom settlement).

Doesn’t this merely show the legal system is doing its job in a country in which big rewards mean big incentives to cheat? Sensitive to such doubts—and painfully aware of the large political contributions of trial lawyers, predominantly to the resurgent Democrats—those pushing for change are, for now, eschewing a radical approach. The boldest suggestion is that damages should be agreed through arbitration, rather than awarded by juries.

Shareholder rights. America may be the land of the free float, but its shareholders lack certain basic rights. For instance, they have only a limited say in electing company boards, unlike investors in Britain, and they have to contend with staggered boards (where only a fraction of the directors stands for re-election in a given year, making it impossible for a majority of shareholders to sack the board in one go). Add to that a proliferation of poison-pill takeover defences and the fact that it is boards, not shareholders, who vote on executive pay (again, unlike Britain).

Regulation. There are three main areas of concern: how financial supervisors interact with the private sector; how they arrive at their decisions; and the fragmented nature of the rules. At the centre of all three sits the SEC. Once accused of being too slow to act, these days its perceived problem is hyperactivity, caused by what a senior regulator caustically calls the “Spitzerisation” of the agency.


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