by Bradley Parsons
Staff Writer
As the City searches for ways to boost the income earned by Jacksonville residents, Foley & Lardner partner Gardner Davis recommends local leaders cast an eye toward Congress and its three year-old Sarbanes-Oxley corporate finance reform package.
Drafted in response to the wave of corporate accounting scandals that rocked Wall Street in the late 1990s, the Sarbanes-Oxley act has succeeded in its purpose to create more accountability in the boardrooms of publicly-held companies. But the legislation’s one-size-fits-all implementation has created a financially burdensome environment for the small and mid-sized businesses that drive the economies of cities like Jacksonville, according to a Foley & Lardner study.
Due to its large corporate practice, the firm has kept a close eye on Sarbanes-Oxley since Congress passed it in 2002. In its third annual study of the impact of one of the largest overhauls in the history of corporate securities law, Foley & Lardner found that the cost of keeping up with Sarbanes-Oxley in 2004 increased 33 percent for public companies with less than $1 billion in annual revenue.
The extra expenditures, most of which go toward accounting and audit fees, are stunting the growth of those companies, hurting job creation and keeping wages lower, said Davis. It’s something the City should consider as it embarks on its Blueprint for Prosperity program, said Davis. The joint initiative is an effort by the City, the Jacksonville Regional Chamber of Commerce and Worksource to raise per capita income in Jacksonville.
“When you’re talking about raising per capita income in the community, a major factor is the number of home-grown, locally-headquartered companies,” said Davis. “Securities laws need to foster capital formation and economic growth in mid-sized communities like Jacksonville. Unfortunately, the effect of Sarbanes-Oxley has been to impose such burdens on smaller public companies that it accelerates the concentration of economic power among the largest, usually out-of-state companies.”
Home-grown companies like Steinmart or Armor Holdings take an interest in their surrounding communities, said Davis. When they expand, they’re more likely to hire and promote from the local labor pool.
Conversely, national companies that run a Jacksonville branch are much more likely to transfer labor from outside the community to fill job openings.
Faced with the growing expense of keeping up with Sarbanes-Oxley, small and mid-sized companies are increasingly pursuing two options: buying up stock to take the company private or selling out to larger companies. The study found that 20 percent of responding companies’ management were considering buying up enough of their company stock to take their company off the public stock exchanges. Fourteen percent are considering mergers.
Either of those courses of action is likely to curb growth, said Davis. Private companies are spending their own money and are less likely to expand than when their accounts were flush with money from stock sales. Merging often means a local company’s top jobs will be filled from the larger company, he said.
“Public companies are a lot more likely to have money, not just to expand, but to support the community,” said Davis. “When a private company is spending its own money, it’s going to cut expenses to the bone.”
Davis suggested reforming Sarbanes-Oxley, scaling the legislation’s requirements according to the size of the company. That would make it easier for small and mid-sized companies to stay public and independent and would free up cash for expansion, he said.
“Sarbanes-Oxley shouldn’t be viewed as some business story unrelated to Jacksonville,” said Davis. “In order for Jacksonville to increase local incomes, we have got to grow the number of successful businesses headquartered in town. The burdens of Sarbanes-Oxley make it more difficult to do that.”