Toy with this one for a moment: US companies are going to be banned from doing business in the European Union unless they appoint employee representatives to their main board. EU bureaucrats are intent on strictly monitoring appointments in the US with a view to closing down the European premises and operations of companies that do not comply.
The result? Moral indignation across the US, trade wars, economic disaster. Don’t panic – yet. It’s not going to happen. Or, at least, it isn’t being planned. The European Commission has favored a lot of harebrained schemes in its time but, to my knowledge, thankfully, this one isn’t even anywhere near the drawing board.
What it does illustrate is the stupidity of trying to impose one country’s financial regulation and corporate governance practices upon another with legislation – without at least having had the decency to discuss a joint approach. The Sarbanes-Oxley Act, known as Sox, did just that and the SEC rightly made the decision to grant non-US companies concessions to some of the legislation in early January. German, Italian and Japanese companies were particularly relieved since they were caught in a Catch-22 situation whereby they could not comply with Sox without first forcing radical changes on their own domestic legislation. The solution might well have been the need to pull out of the US stock markets which, quite clearly, doesn’t benefit the US or other countries. At the time of writing, the SEC is considering further rule changes to aid non-US companies in the US market.
Unfortunately – or fortunately, depending on which way you look at it – these sorts of problems are cropping up on an increasingly regular basis as our capital markets continue to globalize. Legislators, regulators and exchanges have been extremely reluctant to acknowledge the new international framework or do anything constructive about it. While most are keen to welcome non-domestic companies with open arms, they have not been so quick to cede any of their authority to any form of supranational body or reach mutually beneficial agreements with regulators in other markets. The continued conflict over implementation and acceptance of international accounting standards is a case in point. As the US has just shown, trying to impose your will on other markets only leads to indignation and the threat of companies having to delist. At worst, it can lead to economic retaliation.
Ideally, you should let investors decide by rewarding those companies and practices they value with further capital. Over time, of course, they will. There is nothing wrong with investors imposing their will by simply deciding where to put their money. That is everyone’s right. But, as we have seen with recent corporate scandals, that flow of capital does very little to dissuade potentially rogue management teams from behavior that might defraud investors along the way.
Interestingly, a survey of US portfolio managers by London-based consultancy Makinson Cowell at the end of last year found split opinions as to whether the US has the right to impose its regulations on non-US companies. About two thirds of investors believe that if you are listed in the US you should toe the line, yet they give little thought to the practicality of it. The remainder have doubts as to the wisdom of trying to impose such legislation, making some salient points along the way. One fund manager commented, ‘I think it will invite retaliation from the EU countries and a war over corporate governance rules would not be good for the markets.’ Another added, ‘I just don’t think the US government has the right to sue a foreign company. Perhaps it would be helpful if they could get this passed through some accepted international body such as the WTO.’
The problem of an international approach to corporate governance will not go away, but nor will hastily constructed domestic legislation provide the necessary answers. Sox has at least brought the problems to the top of the agenda – the SEC’s decision to grant concessions to non-US companies should be the start of the debate, not the end of the issue.
