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Q&A: Will Overseas Boards Play by American Rules?


Ever since President George W. Bush signed the Sarbanes-Oxley Act into law on July 30, it has caused a furor in Europe and Asia. Aimed at cleaning up corporate governance and accounting in the U.S., some provisions of Sarbanes-Oxley conflict with the laws of other countries. That could pose big problems for non-U.S. companies listed on the New York Stock Exchange and other U.S. markets. Here's a guide to the issues--and the likely outcome:

Q: What's at risk if no compromise is found?

A: Plenty. Foreign companies that trade on U.S. exchanges could delist, while those considering a U.S. listing might wait. At the NYSE, there are 470 non-U.S. companies listed, with a combined global market cap of $3.8 trillion, or about 30% of the total exchange. If even a fraction of those companies bolted, the impact would be heavy. U.S. investors would have more difficulty investing in foreign companies, and the companies that delist would lose easy access to American capital.

Q: What is the likelihood that such an exodus may occur?

A: Low, say most foreign execs. But they stress that it's not out of the question. Already, Porsche (PSEPF) in Germany and Daiwa Securities Group Inc. (DSECF) in Japan have delayed listing on the New York Stock Exchange as a result of Sarbanes-Oxley. Warns SAP finance director Christoph Hutten: "If the SEC doesn't give an exemption to German companies, we would all have a problem."

Q: Why is Sarbanes-Oxley such a problem for foreign companies?

A: Under the law, CEOs are required to vouch for financial statements, boards must have audit committees drawn from independent directors, and companies can no longer make loans to corporate directors. All of that conflicts with some other countries' rules and customs.

Q: Where do conflicts exist with new U.S. corporate-governance regs?

A: Mostly in Germany, where supervisory board audit committees must include employee representatives; by definition, they aren't independent. "That's what finally made us decide no, this [U.S. listing] doesn't make sense," says Porsche CEO Wendelin Wiedeking.

Q: How big a headache for foreign companies are the new U.S. rules?

A: Independent audit committees are almost unheard of at many European and Asian companies. In Europe and Japan, outside auditors are chosen by shareholders, not the audit panel, as required by Sarbanes-Oxley. That may have played a part in Daiwa's decision to postpone its NYSE listing.

Q: Do all non-U.S. companies have a problem with Sarbanes-Oxley?

A: No. TPG (TP), a Dutch package-delivery outfit, and Siemens (SI), the German electronics concern, have already taken steps to comply. French-Italian chipmaker STMicroelectronics (STM) says it will have little difficulty abiding by U.S. law, as will Dutch banking giant ING (ING), Japanese carmaker Toyota (TM), and British-Dutch packaged-goods maker Unilever (UL).

Q: What do foreign companies want?

A: Lobbyists and government officials representing Japanese and German businesses would like to see the law amended to exempt their companies. But with public sentiment against corporate shenanigans still running high in the U.S., congressional leaders don't have much appetite for softening Sarbanes-Oxley. So overseas businesses are trying to show that their practices protect U.S. shareholders just as well as the act. Says Fujio Mitarai, CEO of Canon Inc. (CAJ): "I don't think that our management structures and in-house controls have to match U.S. standards."

Q: Can the SEC help?

A: Yes. It's using its authority to interpret legislative language and ease the burden on foreign companies. The SEC has already proposed two types of exemptions: The ban on insider trading during 401(k) blackout periods would apply to foreign companies only when the blackout affects U.S. employees, and restrictions on use of pro forma financial figures wouldn't be enforced when foreign companies are communicating with their non-U.S. shareholders. Sarbanes-Oxley also gives the SEC some wiggle room to interpret how "independent" directors must be to serve on audit committees. The SEC has no authority over the ban on corporate loans to execs.

In the end, the companies may need to adapt to the new ways of Washington if they are to maintain access to the rich capital markets in the U.S. Compared with the alternative, that may be a small price to pay. By Louis Lavelle in New York, with Mike McNamee in Washington and bureau reports


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