Tuesday, December 21, 2004

Diminishing Returns

Governance: Philosopher Frederic Bastiat famously observed that all economic actions have consequences seen and unseen -- as in those wrought by Sen. Paul Sarbanes and Rep. Michael Oxley. Sarbanes, D-Md., and Oxley, R-Ohio, authored the landmark 2002 legislation that seeks to bring more accountability to corporate governance after the Enron and WorldCom bankruptcies.

And judging from the dearth of recent scandals, as well as the howls from executive offices and boardrooms about costs of compliance, the statute is certainly having observable effects.

As for unintended consequences, most are still to be quantified. These include decisions deferred, risks not taken and investments not made for fear of running afoul of the law's onerous rules.

Some consequences are already clear -- as a recent decision by China's flagship airline illustrated. Due in part to what foreign firms view as Sarbanes-Oxley heavy-handedness, Air China came public not on America's premier exchange in New York, but on London's.

Until now, the NYSE has gotten more than its share of big China deals. Thirty companies based on the mainland or in Hong Kong and Taiwan now trade on the Big Board. Among them are three of the biggest IPOs in the last year or so -- China Life Insurance, China Netcom and Semiconductor Manufacturing International.

Air China's $1 billion offering was the first big China deal that the NYSE didn't land of late. A good question for Messrs. Sarbanes and Oxley, as well as other politicians eager to rein in business, is whether it will be the last.

Diminishing Returns

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