Given a fate of living under the magnifying glasses of SOX and FD, who in their right mind would want to sit on a corporate board these days? The smart board-level people I know in Silicon Valley now reduce their involvement to being merely corporate “advisers.” Thus, the intellectual capital of America’s high tech company boards is falling by the month.
Have you been wondering why, given the current booming economy and stock market, there are so few IPOs? We know that on average more regulation makes an economy less competitive — i.e., regulation is negatively correlated with economic growth. The principle reasons are friction [cost of compliance], and restrictions on competition [think telecom, FCC, …]. But there can be exponential negative consequences of over regulation, such as discouraging startups and encouraging early-stage buyouts. That’s the subject of The Pump-and-Dump Economy.
The short summary is that the Sarbanes-Oxley Act of 2002, the SEC’s Regulation FD, and FASB-initiated new rules on stock option valuation have combined to advantage big over small companies. One of the unintended consequences is measured by the big drop in IPOs. Michael Malone’s concluding paragraphs:
It is often noted in dismay that military academies teach the last war, not the next one. The same can be said for business regulation. In the zeal to punish the excesses of the dot.com boom, the federal government, with the tacit approval of the electorate, sought to not only punish the small number of real evildoers but also build the perfect universal plugs for all of the perceived holes in existing business practices.
The result was Sarbanes-Oxley, Regulation FD and stock option valuation — three great lessons in the law of unintended consequences. Let’s do our own accounting: Thanks to this troika, fewer new companies are going public; economic power is being concentrated in the hands of fewer companies; competition is reduced; new wealth is less widely distributed; the rich are getting richer; fewer talented people want to join entrepreneurial ventures; and corporate boards are getting stupider and more paranoid. And, please note, one of the crucial triggers for economic booms — a burst of young tech company IPOs — has now largely evaporated.
Just curious, but is this really what federal regulators, Congress and shareholder rights activists had in mind?
Regulation and compliance costs are one of the key reasons that agriculture has so few small-medium players. I hope we are not seeing the first phase of such a trend in the high tech arena.
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