WATCHING part of the U.S. House Financial Services Committee hearing on the Securities and Exchange Commission yesterday, I thought Chairman Christopher Cox and his fellow commissioners made a good impression before a committee conflicted over whether the SEC is too friendly to business or not friendly enough.
Republican members of the committee were loud in their concerns that burdensome regulations and huge class action awards are frightening foreign companies away from America’s securities markets and making the country less competitive. Section 404 of SOX, which deals with internal controls, drew a lot of attention.
The general message seemed to be that there’s just too much red tape and too many shareholder lawyers making too much damn money and it’s killing America’s competitiveness. I got worried there for a moment, until Chairman Cox flashed that reassuring, confident smile of his and declared that the “sky is not falling.”
It’s the global economy, stupid
One thing that stuck out for me was Chairman Cox’s repeated reference to the internationalization of the securities markets and intense global competition for capital as vital context that should be factored into lawmakers’ thinking about how to respond to complaints from the business community that the SEC’s regulations are too burdensome and costly.
Being an American company has much less cache on the world stage than it once did. While most investors around the world likely perceive the U.S. markets as the safest due to the highly advanced regulatory environment and stiff penalties for wrongdoers (thanks in part to SOX), there’s no longer as wide a chasm between standards in the U.S. and those in Europe, for instance.
International companies also deserve a lot of credit for closing the perception gap. They have been quite adept at marketing themselves to investors internationally. Some are particularly good at using the Internet to reach out to a global audience. It’s remarkable, for instance, that German companies in our survey of global IR websites perform better on average than almost all of the North American companies we survey.
And here comes Malaysia, offering free websites
But it’s not just developed markets where competition is heating up. Just last week, Bursa Malaysia launched the new Malaysian Investor Relations Association (MIRA). MIRA is offering special incentives, including a free investor relations website for two years, to all public companies in Malaysia that establish an IR function and certify at least one individual for investor relations. The incentives are being paid for by the Capital Markets Development Fund, set up by the Malaysian government to encourage growth in the country’s securities markets.
Moves like that by Malaysia may not seem like an immediate threat to a large-cap U.S. company listed on the New York Stock Exchange, but they could be. And they are most definitely a challenge to mid- to small-cap companies, and particularly to companies in other emerging markets.
I looked at the websites of the founding corporate members of MIRA and was impressed with two companies in particular. From an objective perspective, there wasn’t much difference between the standards of these companies and a company in Norway, or the Netherlands, or the U.S. They can hold their own.
The difference is the local regulatory environment, about which I know too little to comment in any depth, but I’m certain that most investors outside of Malaysia would perceive it to be less secure than the regime in the U.S.
In that sense, U.S. companies should be thankful they have the SEC and its perceived credibility. Without it, many American companies would be at a distinct disadvantage in the global securities markets.