Getting real about Sarbanes-Oxley.

Hon. William H. Donaldson

Chairman

Securities & Exchange Commission

Washington, D.C.

Dear Bill:

We don't blame you for not talking to us for our story on the SEC this month ("The SEC's Man of the Hour," page 30). You're under pressure and have to play your cards close to the vest.

But we heard your remarks at the recent New York Financial Writers' dinner. We were the ones who asked, "Do you think Sarbanes-Oxley is imposing too much cost and bureaucracy on American companies?"

You said, "I believe that the costs are justified." You added that you might develop rules to handle "unintended consequences" and you might revisit the law's impact--"but not for a while."

It seems, Bill, that you may be spending too much time in that narrow arc of real estate between Manhattan and the District of Columbia. It's true that the big guys such as AIG's Hank Greenberg, our 2003 CEO of the Year, can afford to add more outside directors and comply with Sarbox and the new stock exchange requirements.

But throughout the rest of the country, small and mid-sized companies are having real troubles with the new rules, as we report in "The Sarbox Ball and Chain" (page 27). Complying with the regulations is creating huge opportunities for accountants, auditors, lawyers and people selling technology-based compliance systems. These are fine individuals and we respect their right to maximize their incomes.

But is that really the intent behind Sarbox? To load up extra costs and procedures on companies that lie at the heart of the American job-creation machine? And to what end? Will these new requirements really stop anyone from cheating? You'll recall that the Enrons and WorldComs and Tycos were big companies.

There are two implications that might flow out of heavy-handed enforcement of Sarbanes-Oxley on smaller companies.

The first is that our jobless recovery might continue to be jobless. If a company of $500 million or $1 billion in annual sales has to spend, let's say, a total of $1 million to pay for more independent directors, support them with staff, pay for more directors' and officers' insurance, design new internal control systems and spend more time in board meetings, that's a material cost. Are the CEOs of these companies going to spend their money on compliance, or on hiring and building new plants? Are they going to spend time with three tiers of auditors, or go out and try to expand their businesses?

We asked our readers about Sarbox in our CEO Confidence Index this month ("The Mood Continues to Improve, But ...," page 12) and they confirm that it's having an impact on how they run their businesses. Said one of our nearly 600 respondents: "The new law's certification regs are causing CEOs and CFOs of public companies to avoid risk--new investments, new products--because the rewards for a failed risk can be jail or massive law suits." This faithful reader wants to know what kind of enforcement climate the SEC is going to establish.

A second implication of mistargeted Sarbox enforcement might be that more companies will either stay privately held or transform themselves from public into private companies. An overwhelming 82 percent of our CEOs this month believe it's better to be private than public. The net effect could be that a larger cross section of American economic activity will take place in private companies that don't have to endure the slings and arrows of outrageous enforcement. Is that the intent of the federal government?

So here's what we're trying to say to you, Bill. We know we can't go back and repeal Sarbox or amend it through the legislative process. But you have the power to set the tone for enforcement. We encourage you to use your new powers to root out any remaining conflicts of interest and self-dealing in our system. But please don't create an enforcement climate that paralyzes the people running the heart of the American economy. Send us a signal, won't you? We're all watching.

--Chief Executive