- The Washington Times - Sunday, April 22, 2007

This is National Small Business Week. Should those of us concerned about small business care about regulation and capital markets? Put another way, should Main Street care about Wall Street?

Last week, Tom Sullivan, head of the Office of Advocacy at the U.S. Small Business Administration, submitted testimony to the U.S. Senate Committee on Small Business & Entrepreneurship. His comments were titled “Sarbanes-Oxley and Small Business: Addressing Proposed Regulatory Changes and their Impacts on Capital Markets.”

But if you’re not a wealthy investor, stockbroker, trader, investment banker or CEO of some big business, what’s the big deal? Aren’t tighter regulation and more lawsuits supposed to protect the little guy. As many have said, what’s good for Wall Street ain’t necessarily good for Main Street.

In reality, though, no economic chasm exists between Main Street and Wall Street. This should be abundantly clear in the early 21st century. We increasingly are a nation of business owners. Not only did the number of U.S. businesses increase by 134 percent between 1975 and 2005 (based on Internal Revenue Service tax return data), compared to a 37 percent rise in population, but today more than half of all U.S. households have equity holdings. Today, Main Street is Wall Street, and Wall Street is Main Street.

But what does Wall Street do for Main Street? Equity and debt markets provide access to the capital needed to grow businesses, develop products and create jobs. Efficient, liquid markets allow companies to raise capital at lower costs, and provide investors with the confidence they will be able to buy and sell shares or debt (and related instruments) easily. Nonetheless, our nation has gone through periodic bouts of populism whereby politicians bash Wall Street and CEOs in the hopes of gaining power, special interest support and votes.

The most recent bout of anti-Wall Street populism came after the collapse of Enron in 2001 and the Worldcom scandal in June 2002. By the end of July 2002, Congress had passed by overwhelming margins and President Bush signed into law the Sarbanes-Oxley Act (SOX). Unfortunately, SOX can only be described as a hasty, sweeping political response to a handful of high-profile corporate scandals. It was law driven more by political posturing than thoughtful reflection.

The fallout has been negative for both Wall Street and Main Street. The most often cited problems are for small and medium-sized companies, as well as foreign corporations, when it comes to Section 404 of the law, which requires costly internal and external audits of accounting controls. As Mr. Sullivan noted: “There is a compelling record demonstrating that the costs of complying with Section 404 are large and disproportionately high for small public companies.” Fewer smaller firms can afford to go public, more public companies have considered going private, and U.S. markets have become less competitive globally.

But problems reach beyond SOX. For example, the corporate social responsibility (CSR) movement wants the government to impose corporate governance mandates in the name of standing up for the little guy against big economic interests. But in reality, the CSR movement wants to transform U.S. corporations from economic entities that pursue profits by providing goods and services that others need or want, and doing that job as efficiently as possible, into vehicles that serve the assorted political and social missions of various special interests, such as labor and environmental groups.

Of course, shareholders already have the ultimate vote on how companies are run by buying or selling shares. Meanwhile, corporate executives have a clear responsibility to maximize profits for owners, i.e., shareholders. When corporate executives stray from that purpose and use shareholders’ resources on other endeavors — no matter how noble these might seem — they are violating a trust, acting unethically, and doing a disservice to the economy. Can that be good for the little guy?

And don’t forget about lawyers who have a big incentive to pit shareholders against businesses. One shareholder adviser was quoted in a recent New York Times story criticizing the Bush administration and the Securities and Exchange Commission for being “very pro-business and anti-investor.” Hmmm, pro-business and anti-investor — does that make sense? Reducing litigation costs and abuses is good for businesses, and therefore, good for the owners of those businesses. But from a trial lawyer perspective, shareholders must have an adversarial relationship with the businesses they own, and open to bringing lawsuits that will enrich lawyers.

Other problems plague Wall Street and Main Street. For example, mandated options expensing in the name of accounting reform merely makes for bad accounting and creates additional costs and uncertainties for small, entrepreneurial firms that use stock options to compete for talent.

Government meddling in hedge funds and executive pay are under consideration. Is Main Street really helped when government arbitrarily seeks to limit those who can invest in hedge funds or interfere with the strategies of those funds, or dictates the type and degree of compensation that business executives can earn? Or are such actions by politicians and their appointees — whose pay incidentally is in no way linked to performance — opportunities for political pandering with little consideration given to the potential impact on markets?

But there seems to be at least some growing recognition that government has gone too far, even beyond the usual free market suspects. For example, New York City Mayor Michael Bloomberg and New York Sen. Charles Schumer — two politicians not exactly known for shying away from government interference in the economy — authorized a study that summed up the current challenge pretty well: “As market effectiveness, liquidity and safety become more prevalent in the world’s financial markets, the competitive arena for financial services is shifting toward a new set of factors — like availability of skilled people and a balanced and effective legal and regulatory environment — where the U.S. is moving in the wrong direction.”

As entrepreneurship and global competition continue expanding, relief from burdensome regulation and costly litigiousness should be a common goal on Main Street, Wall Street and in the halls of government.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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