Back to issue home page

Cox, a Republican from California, is President Bush’s pick to replace outgoing SEC Chairman William Donaldson, who worked during his more than two years in that role to restore investors’ confidence in public markets after the debacles of Enron and other corporate scandals. During that time, the Sarbanes-Oxley Act—corporate ethics legislation called SOX—began requiring publicly traded companies to comply with rigorous financial and accounting disclosure rules.

The increased regulations have been “too great a swing the other way in an attempt to cut back” on corporate fraud, says Eddie Jones, president and founder of Nashville-based investor relations firm Corporate Communications. Jones, a former securities analyst, says SOX has increased the expense and the time element of financial reporting dramatically, but without completely rooting out fraud. The small number of bad actors still will not get caught, even with these regulations in place, he says, adding that SOX has become “a retirement program for accountants.”

Jones cites a recent example of the fallout of such stringent regulations: In a sudden and dramatic show of frustration with these pressures, the chief financial officer of Outback Steakhouse resigned during an earnings conference call, blaming “recent lunacy over lease accounting.” A published report later quoted him saying his aggravation was caused not only by the amount time spent on regulatory compliance but the unproductive time spent—and whether there’s any value in that process. According to Jones, a couple of his firm’s publicly traded clients recently have gone private, largely because of the cost of the regulations. He says it’s difficult to know the full effect of SOX because we may never know how many companies are deterred from going public because of the associated costs.

Could new blood leading the SEC help discourage this kind of flight from the public markets? “Sarbanes-Oxley has helped people pay attention to things, but it went too far,” Jones says, adding that he hopes Cox will soften the impact of those regulations. “I’m hoping the pendulum will come back. The key word is ‘balance.’”

Cox, who notably in 2002 served on the House-Senate committee that wrote SOX, may have hinted at what lies ahead when the President nominated him as chairman in early June. Cox said Congress and the Bush Administration “have both done their part to strengthen the laws that protect investors and our financial markets.” He added, “And if confirmed, I look forward to carrying out that mandate in the special role occupied by the Securities and Exchange Commission.” (At the time this article was published, Cox had not yet begun Senate confirmation hearings; Senate confirmation is required for him to become chairman.)

Even so, one Memphis-based manufacturing company is eager for a break from Donaldson’s strict rule, hoping Cox will lighten the load on publicly traded companies. Kent McKee, CFO of Mueller Industries, which trades as MLI on the New York Stock Exchange, says, “We’re interested in seeing some improvements in Sarbanes-Oxley requirements that—in our view—have heavily burdened U.S. industry, which is trying to be competitive in the global economy.” McKee knows well the price Corporate America has had to pay for the strict regulations that resulted from the actions of a few bad seeds: Mueller Industries’ payments to accounting firm Ernst & Young more than doubled from 2003 to 2004. McKee views the failures of Enron and WorldCom as cases of management override, not problems at the “detail level,” which is where SOX seems to be focused.

He hopes that Cox will be “more reasonable” from a policy standpoint. “SEC leadership—as they write regulations—could be a voice of reason,” McKee says. “From our point of view, they’ve overreached on regulatory burdens, and that’s not helpful.”

Joan Heminway, a University of Tennessee law professor who teaches securities regulation and corporate finance, agrees that the SEC chairman and the other commissioners would better serve companies and investors by focusing first on a global, or holistic, perspective. Heminway is looking to Cox to act more as a visionary, saying, “Here’s the way companies ought to operate.” Then as spot issues come up, the SEC will know how they fit in the larger scheme.

“I think most companies will breathe a sigh of relief that the new chairman is not someone with more liberal tendencies, but it’s no surprise that he’s conservative, considering he was nominated by Bush,” Heminway says. She adds that there are rumblings in Washington that Congress may be considering amendments to SOX for certain aspects of the legislation that are considered too onerous. However, Heminway says she doesn’t expect Cox to necessarily lighten the load, although he likely will lend an ear to perturbed corporate leaders.

As for hot-button issues like new rules requiring companies to expense stock options, how to determine a valuation for those options, and the increasing responsibility and risk involved with serving on corporate boards, Heminway says, “No individual person like Chris Cox is going to change the course of history—not quickly—on some of these issues.”

Still, just as many of Donaldson’s actions reflected his response to the scandals that preceded his chairmanship, perhaps Cox—even though he bills himself as a “leader in promoting strong reforms to restore investor confidence”—will respond to the outcry among U.S. companies and cut them a little slack.

Back to issue home page

Email to a Friend Print-Friendly Format