It is well accepted that the burdens and consequential liabilities imposed by regulation is a general factor considered by a company in deciding where to list. This appears to be no different when the specific topic is CG regulation, as confirmed by research undertaken by the UK Government's Department of Business, Innovation & Skills (BIS) in 2013, as discussed in Appendix II.1.1. The BIS research suggested there is a general desire among companies to maintain the status quo, rather than continually increasing the regulatory burden. Nevertheless, there was widespread acceptance that CG regulation and reporting is necessary and desirable for maintaining market standards and providing investors with the required levels of transparency to generate confidence.
One of the essential metrics of assessing a CG system is therefore how well the balance of market standards and an issuer's regulatory burdens is established and maintained.
Where it is proposed to increase the CG regulatory burden, it is therefore appropriate to ask what is the underlying mandate of doing so, or, to put it another way, what further CG regulations are justifiable in view of the standards expected of the market by each of capital users, capital providers, and the providers of liquidity to the market?
The experience of the United States post the introduction of Sarbanes-Oxley Act of 2002 (SOX) is in some ways a relevant case study that testifies to the often mistakenly held belief that a more extensive regulatory system goes hand-in-hand with the concept of a developed market. Introduced in 2002, SOX was an Act intended «To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.» It introduced a number of important provisions relating to financial disclosures including establishing the Public Accounting Oversight Board (PCAOB), and regarding auditor independence and audit committee governance.
However, SOX also had its consequences for the market, the most significant of which being that it acted as a deterrent to foreign companies seeking a listing in the United States, as well as causing others to withdraw their listing. Research suggests that while SOX may have increased the reliability of financial disclosures, less information is available as a result of SOX. It has also been suggested that business agility and responsiveness in responding to the market has been lost, «So when directors are now asked to do something, they respond that they have to make sure they are doing the required certifications. Response and time go out the window." Congressman Oxley, one of the authors of the Act, has expressed concern that the Act may be causing companies to be excessively risk averse for fear of breaching the Act, and that this in turn is damaging economic growth prospects. Finally, it must be pointed out that while SOX toughened audit and disclosure requirements, SOX «did not avert the problems that
have taken place in investment banks and other financial institutions, including excessive leverage and other reckless governance practices.»
Another way to look at this is: what problem is affecting the conditions for free market (e.g. agency cost, investor rationality, etc) and what rule can be designed to remove or address this?
Any consideration of the balancing of market standards and an issuer's regulatory burdens must additionally consider the types of company (in other words, its management and governance profile) that are seeking a listing (or are already listed) on a particular market, or the types of company that a particular stock exchange seeks to attract. The BIS research cited above also found that where companies were already accountable through reporting to private equity shareholders, parent companies, and industry regulators, they were not overly concerned by the additional CG burdens of listing. Nonetheless, such companies still viewed the additional time and cost involved as a burden.