Globalization Gone Awry?

Chief Executive (U.S.), January/February 2007 | Go to article overview

Globalization Gone Awry?


As markets evolve, onerous regulations and a punitive tort system may be driving companies out of the U.S.

For decades, globalization has been heralded as an opportunity for tremendous growth. And, in fact, the integration of economies around the world has lived up to its promise -affording companies, consumers and markets alike greater access to capital, technology, cheaper imports and larger export markets. But opportunity comes at a price.

As foreign capital markets grow both more sophisticated and more accessible, the U.S. seems to be losing its edge in the market for publicly traded securities. Increasingly, large foreign firms seeking to tap into big pools of institutional and retail funding that routinely chose the U.S. are looking at the London Exchange. And promising ventures in emerging markets like China and Russia are shunning the U.S. IPO market.

Why the shift? One clear factor is the prospect of complying with the U.S. regulations for public companies, which is universally viewed as an overly onerous and prohibitively expensive endeavor. "Whenever Ken Livingstone, the mayor of London, is asked about competing with New York, he just says, 'Sarbanes-Oxley,'" Martin Sullivan, CEO of AIG, told participants in a CEO Summit discussion on globalization held in partnership with NASDAQ. "He doesn't have to say anything else."

But another hurdle also contributes to the rush away to foreign markets-the U.S. tort system. Critics charge that litigation involving compensation for injuries runs rampant in the U.S. and that the legal system is inefficient-not to mention arbitrary and open to abuse. Clearly, it's costly. In 2003, tort cases cost the U.S. $246 billion, or $845 per citizen-and increasing numbers of such cases concern shareholder plaintiffs.

"When we ask why IPO clients chose not to list in the New York market, the first thing we hear isn't Sarbanes-Oxley," noted Dennis Shaughnessy, chairman of FTI Consulting. "It's the tort bar. Over the past four years, class action cases are more likely to be about pension plans or other activist shareholders-not widows and orphans. And a lot of companies around the world simply don't want to subject themselves to that."

That the exchanges themselves lag behind in the race to go global doesn't help matters. "Exchanges have historically been domiciled in their respective countries and never looked outside of their home market," asserted Robert Greifeld, CEO of NASDAQ. "In shifting to operate on a global basis, we have the impediment of each country having a unique regulatory environment."

Consolidation of exchanges would create a game-changing seamless, crossborder trading environment, added Greifeld, whose company is seeking to combine forces with the London Exchange. …

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