Regulation driving companies away from the public markets


The burden of regulation on public companies in Europe has become so great that an increasing number could desert the public markets to operate privately instead.

That is the stark warning from a new report by professional services firm KPMG which explored the attitudes of senior figures in Europe, ranging from standard-setters to CFOs and from regulators to accounting officers.

Their overwhelming message is that while great improvements in corporate reporting and transparency have been made over the last few years, a quieter period allowing new regulations to bed in is now needed.

Paul Boyle, CEO of the Financial Reporting Council, represented the views of many when he said: "There is a widespread concern that regulation has gone beyond the point at which it is useful. The balance between investor protection and creating prosperity may have been over-stepped."

The Sarbanes Oxley legislation that emanated from the USA in 2002 was the focus of many commentators' dissatisfaction. There was a clear view that the legislation, and in particular the infamous Section 404, went too far and placed excessive requirements on companies.

Neil Lerner, Global Head of Regulatory Issues at KPMG, said: "There are few companies who believe that the benefits outweigh the costs. And it is wholly based on financial controls when many business risks are non-financial."

Sarbanes Oxley is expensive but the cost is not justified for the benefit

John Coombe, formerly CFO at GlaxoSmithKline, was one of the most scathing in his assessment: "It is a classic legally-driven American nightmare which is expensive and is not going to stop people stealing money from companies…Sarbanes Oxley is expensive but the cost is not justified for the benefit."

For Sir David Tweedie, Chairman of the International Accounting Standards Board, the problem with Sarbanes was the speed with which it was introduced.

"The American legislators are a bit dismayed at what is happening," he said. "They were trying to fix things quickly. I don't think the effects on overseas companies were in their minds."

However, Mr Coombe did concede that SOX had produced some benefits: "A good company can learn from having to put everything on the process down in detail," he said.

Others pointed out that the regulations had precipitated big advances in corporate governance and transparency.

"Compare the annual reports of today with those of five years ago and you can see an enormous change," said Prof. Dr. Klaus Pohle, Chairman of the German Accounting Board and Chairman of the Audit Committee of DWS Investment GmbH.

But the environment of heightened reporting requirements has produced a shift away from developing the business itself towards ensuring that the business is not in danger of falling foul of any reporting requirements.

Robert Koethner, Vice President for Accounting, Planning and Reporting at DaimlerChrysler, said: "In many cases organisations have been harmed. People should care about selling their products. Whole organisations have been infected by these regulations."

Whole organisations have been infected by these regulations

There has also been a shift in behaviours amongst many due to the heightened climate of liability. Prof. Dr. Klaus Pohle said: "It is the problem of liability. I have to make judgements but I am under pressure from potential lawsuits. It makes life pretty uneasy."

Paul Boyle also believed that increasing regulation is "driving people off the public markets", a view shared by John Coombe who said that "people will be much more cautious about going onto boards.

"People are going off to private equity and hedge funds. The really good people are not necessarily staying in regulated businesses and it's all down to the documentation and personal liability," he added.

But Mr Coombe was not sanguine about the rise of private equity: "All private equity is doing is taking companies out of the public domain. They are gearing up and making a fortune when it works and leaving the problems with the banks when it doesn't."

In contrast, the introduction of IFRS was widely greeted as a positive and beneficial step – "the concept of universal international financial reporting standards is in theory unchallengeable" according to Paul Boyle – which would help to drive greater convergence of financial reporting.

However, concerns were raised over the costs associated and the amount of information IFRS will generate which, according to Prof. Dr. Pohle, "will lead to more interpretations." According to Sir David Tweedie: "In the short term it will be nasty. In the long term it will be good."

Against a backdrop of so much regulatory change, there is an overwhelming sense that breath needs to be drawn so that a quieter period of acclimatisation can begin.

As Neil Lerner, Global Head of Regulatory Issues at KPMG, said: "What is clearly needed is a period without new initiatives and an attempt to create a framework to allow convergence around the world."