SOX Center

Paul Sarbanes and Michael Oxley, renowned authors of the 2002 Sarbanes-Oxley corporate governance reform legislation, have become America’s favorite whipping boys for the emigration of foreign equity listings from New York to London. But it was the earlier efforts of another congressman, one who now has far more influence over the competitiveness of the US capital markets, which in fact sparked the exodus by deliberately mixing domestic market regulation with foreign policy.

In 1999, two commissions reported to Congress on Chinese military links to commercial and financial activities in the US. The reports grabbed headlines with their focus on the purported role of the US capital markets in financing Chinese weapons development and proliferation. The first of these commissions was chaired by congressman Christopher Cox, now chairman of the Securities and Exchange Commission.

Financial Times: Cox, not Sarbox, is to blame for equity exodus

When the new Congress begins its session this week, two familiar faces will not be present: Senator Paul Sarbanes and Representative Michael Oxley, who are both retiring. Their main legacy will be the joint attack on corporate corruption that bears their names — the Sarbanes-Oxley Act of 2002.

The act, which was passed hastily in the wake of the Enron scandal, was surely well intentioned. But it has proven counterproductive in the extreme, and Congress would best honor the departing lawmakers by repealing it. Sarbanes-Oxley has seriously harmed American corporations and financial markets without increasing investor confidence.

The section of the law requiring companies to perform internal audits has turned out to be far more costly than proponents projected, especially for smaller firms. These costs have led some small companies to go private — hardly a victory for public oversight — and some foreign firms to withdraw their stocks from American exchanges.

In addition, the average “listing premium” — the benefit that companies receive by listing their stocks on American exchanges — has declined by 19 percentage points since 2002. This explains why the percentage of worldwide initial public offerings on our exchanges dropped to 5 percent last year, from 50 percent in 2000.

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