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USA: Corporate Governance Law 'Too Strict'


by Mark Tran The Guardian
June 22nd, 2004

Larry Weinbach, the chief executive of Unisys, accused Congress of overreacting yesterday when it introduced legislation following Enron and other financial scandals.

Mr Weinbach, whose technology company boasts annual sales of $6bn (3.3bn), joined other executives who have recently criticised the Sarbanes-Oxley law for imposing too many burdens on companies.

Congress passed the Sarbanes-Oxley law in 2002 in reaction to a spate of financial scandals, notably Enron and WorldCom, that shook public confidence in corporate America. Sarbanes-Oxley, which called for tighter internal company controls, caused a rethink of  corporate governance laws in the UK as well, with the publication of the Higgs report, written by Derek Higgs, the former investment banker.

But in the US, a corporate backlash has been steadily building up against Sarbanes-Oxley.  Last week, the head of the New York stock exchange, John Thain, asked in the Wall Street Journal whether regulation had gone so far that foreign companies had decided against listing in the US.

Mr Weinbach, who was speaking to reporters on the sidelines of a European press briefing in the French resort town of St-Paul-de-Vence, added his voice to the upsurge of criticism of Sarbanes-Oxley.

"Congress was shooting from the hip in response to mistakes some businesses made in not living up to financial transparency," Mr Weibach said. "Congress felt it had to do something and did not realise the full ramifications."

The Unisys boss said parts of the new corporate governance regime were appropriate, such as independent directors and a compensation committee, but others were onerous and very expensive.     Others have made the same complaint. Hank Greenberg, the chairman and chief executive of insurance giant AIG, recently complained that his company was spending almost $300m (£164m) - 1.5% of total operating expenses - on total regulatory and corporate governance expenses. Mr Weinbach said Unisys's audit fees had gone up and some of the documentation required was "over the top".

Mr Weinbach admitted, however, that Sarbanes-Oxley was not going to go away.  "It is expensive, some of it doesn't make sense, but we have to live with it," he said. But he predicted that the pendulum would swing back in the other direction and that parts of the legislation would be modified in two or three years.

Not everyone one believes that Sarbanes-Oxley is imposing too high a financial and administrative burden on corporate America. The Teamsters union recently cited figures from Glass Lewis, the proxy advisory firm. They showed that total audit fees for 461 of the Fortune 500 companies rose 15% last year. While the rise seemed large, the union argued, companies still managed to report record profit margins.

Nevertheless, some experts believe that congressional reaction to the spate of scandals has been over-legalistic, pointing to the advantages of the UK approach, where a lighter touch is being applied. The UK has resisted taking a mandatory approach and relies on an essentially voluntary system.  One change has made a significant difference in Britain. In requiring companies to put compensation packages to a non-binding vote at annual shareholder meetings, investors have had the chance to show their exasperation, notably in the case of GlaxoSmithKline, the pharmaceutical giant.

Shareholders at that company's annual general meeting last year voted down proposed million pound remuneration deals for executives. A revised package was approved this year.     "Sarbanes-Oxley takes too detailed an approach," said Jonathon Story, professor of International Political Economy at Insead, the European business school.




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