Robert Samuelson’s post at the Washington Post’s blog on the effects of regulation on the economy is sure to provoke the usual reactions from the usual suspects. Most of the post is devoted to the unforeseen effects of Sarbanes-Oxley which, according to Mr. Samuelson, has had the result of reducing profitability which in turn has had a chilling effect on start-ups.
I’ll add a few observations from my own direct experience with Sarb-Ox. Since compliance costs rise less than linearly with the size of the company, Sarb-Ox provides a competitive edge to large companies at the expense of small and medium-sized ones. Large companies haven’t been hiring for decades—they’ve been reducing their workforces—their payrolls have declined by hundreds of thousands or even millions during the late recession. Indeed, I’ve read some articles in the last couple of weeks that suggest that declines in productivity has been a consequence of too-aggressive workforce reduction—something I claimed at the time. There were companies who weren’t just firing the people they had to but were firing them to give a temporary boost to their stock prices.
The net effect of this is a worsening of the unemployment situation.
Additionally, contrary to what was intended and what people seem to believe Sarb-Ox doesn’t just affect big companies. It also affects smaller companies that do business with big companies. I have clients whose Fortune 50 customers have required them to be Sarbanes-Oxley compliant despite the law never having been intended for them. In my clients that’s resulted in hundreds of thousands of dollars in additional costs and I suspect that’s in the billions or tens of billions throughout the entire economy.
Recently, I’ve been seeing more and more costs associated with compliance with the PPACA, something I think many of the organizations involved are completely unprepared for. From what I’ve seen so far it could result in the largest boondoggle in the history of humankind.
We need regulations. However, the necessity of regulations in the abstract doesn’t mean that every regulation is good. And, whether they are good or not, every regulation will inevitably have its unintended effects very few of which are likely to be benign.
There were companies who were just firing the people they had to but were firing them to give a temporary boost to their stock prices.
Typo alert. That second “were” should be a “weren’t”.
Yes. Fixed. Thanks.
I have to admit Large Corporate isn’t my field. But as a simple mathematical exercise I wonder if we could calculate the cost ofreductions in employment costs and amortize them over the number of shares outstanding and come to anything close to the stock price increase.
I don’t know the answer, but Drews intuition is generally good. I bet not. I bet not in even the same ballpark.
Further, what would be the utility of e temporary, and I mean very temporary, rise in stock price would be?
I’m open to other suggestions on why one would reduce payrolls below the level needed to accommodate demand.
My intuition on this is when a) you hire the guy who wants money the most (rather than the guy who wants to help the company grow the most) and b) compensate him with stock so goosing the stock even temporarily works in his favor you’re incentivizing the wrong stuff.
The people at the very top might not being making all the decisions. There were three things that went into my getting canned at The Mouse, but the reason why I HAD to get fired was because my director had badly blown through his annual budget in the first four months of the FY. He had been given a special project to run (he had been campaigning for it for years) and when given the opportunity he overspent his budget by about 25%. [For the record, I had nothing to do with that project – it was a separate team.] He had to make up as much of that as he could in the remaining 8 months of the FY, and the only way he could do that in our department was to reduce headcount.
Now as a director at the company he had three layers of VPs over him, and then a president, and then a chairman, and that was just for Parks & Resorts. There was a corporate structure on top of that. But he reduced headcount just to make budget, and I’m certain it reduced the efficiency of the department*. In that case he was hoping to reduce headcount for six months, which just happens to be the minimum length of time it had taken to hire someone at my level for the five previous hires. These kinds of decisions can add up.
* In my opinion, the whole department was largely a waste of money, and if I were in charge of Parks & Resorts I would have closed our entire section, but that’s just me, and those are other stories.
That might have been the case for one or two companies but scores of large companies engaged in significant reductions in force, many without the sharp dropoffs in sales you’d anticipate if they were hunkering down in survival mode.
This from Ip seems relevant. We may very well have just reset our output production. Altering/eliminating regs may be mostly irrelevant.
http://www.economist.com/blogs/freeexchange/2012/03/explaining-americas-macro-puzzles
Steve
Yeah, I thought about posting on that, Steve. As you can see Greg Ip is suggesting that the point I’ve been making for the last several years is worthy of consideration.