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Regulation will always be with us, and in recent years it has grown far
faster than the companies and the economies it is ostensibly there to protect.
The signs are that this growth may be slowing, but should companies be heaving a
sigh of relief, or should they be watching out, apprehensively, for the next

These questions are answered in a new report from KPMG called The Pressure of
Regulation on Business. In a series of interviews with the movers and shakers
across Europe it becomes apparent that even regulators feel that we have reached
a peak. “We are reaching a high point of regulation,” says Paul Boyle, chief
executive of the Financial Reporting Council in the UK.

But, even with delays in implementation, it is Sarbanes-Oxley which is still
at the heart of people’s doubts. John Coombe, former finance director at
GlaxoSmithKline, made the point that: “It is a classic legally-driven American
nightmare, which is expensive and is not going to stop people stealing money
from companies.” People acknowledge that some of the process that it enforces
will be useful. Detailing how the company goes about such controls is valuable.
But the cost, because of the wrong-headed idea that it will catch fraudsters, is
far too high. “The cost is not justified for the benefit,” says Coombe.

And the report also reveals how deep-seated these doubts are. Jaap Winter,
who chaired the EU High Level Group of Company Law Experts, is clear about this.
“The real problem is not fraud, but slacking and under-performing executives who
are not controlled by non-executive directors, or by shareholders who take
little interest because the share price is fine,” he says. “Sarbanes- Oxley
doesn’t address that.”

This type of view is common across Europe. Many are realising that much of
the solution is in the hands of investors rather than regulators. One of the
factors which has brought about this change of heart was the Deutsche Börse
affair earlier in the year when shareholder power played a key role. “People are
having to adjust to what their shareholders are thinking,” says Boyle. “On
balance, this is a good thing though, like democracy, it would be better if
everyone did it.”

The doubt is also whether, having given investors this increased power, they
will use it as wisely as people might hope. “The fact is,” says Winter,
“investors have more influence and powers. It depends on whether they use them
in a good way.” For Winter: “The struggles over European stock exchanges have
tended to reflect short-term perspectives. I’d rather have the cash out of the
company. But it is not clear whether that is a wise decision in the long-term.
There is a need for strong European stock exchanges,” he says.

It is a difficult one. Investors are not always going to take the decisions
which the experts might hope that they would. And regulators may find it
difficult to stand back if the decisions taken are simply reflecting a desire
for a fast buck rather than the long-term development of the market. “When they
make use of these rights it will require some responsibility and restraint among
shareholders,” says Winter. “It is more in their own hands, but there is a risk
that they will do the wrong things.”

One person’s wrong thing might well be another person’s right thing.
Certainly, regulators think so. But in the end, they have to rely on the
long-term pressures for sensible behaviour. “There is an increasing realisation
that good governance and transparency helps,” says Boyle. “There is less of the
type of remark that ‘two girls on the check-out do more for profitability than a
non-executive director’ around now. Companies with genuine longevity tend to be
the ones which are properly governed.”

It is probably this sort of view which suggests that regulation will begin to
pull back. Only another corporate disaster would provoke a sudden rise again.
And this time, regulators would have to learn the lessons from the Enron and P
armalat aftermaths that new regulations, which will do nothing to stop the
specific disasters, are just window-dressing, and thus hugely expensive while
achieving no obvious benefits.

“If the regulatory changes reduce the chance of wipe-outs, that is good,”
says Boyle. “If people run companies for the benefit of investors rather than
for their own benefit, that is good.” But for Boyle there is another ingredient.
“We need to be careful that we don’t overdo the regulatory burden.”

Tides turn. Fashion changes. The economic cycle dips and rises. At the moment
the appetite for regulation is slowing.

The Pressure of Regulation on Business is at

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