7. Regulatory Impact Assessments

Regardless of the combination of reform strategies that can be used, an assessment of the costs implementing and enforcing these is a requirement. The implementation of new legislation and corporate governance codes can be costly. Before introducing more legislation and standards, impact assessments should be conducted to assess the financial implications of enforcement and compliance. Regulatory impact assessments are common in the West. In emerging markets, corporate governance standards are regularly introduced while impact assessments are not required or conducted as part of the legislative reform process.

It is estimated that the aggregate annual costs of implementing Section 404(a) of the Sarbanes-Oxley Act are around $1.24 billion or $91,000 per company (SEC, 2003c).[18] This section requires companies to include in their annual report a management report on the company's internal control over financial reporting.

FEI (2004) found the total costs of compliance with Section 404 to be $3.14 million for listed companies with average revenues of $2.5 billion.


Table 2: Company Law Reform Initiatives
 

Financial markets across the globe are overhauling their corporate governance systems with the introduction of new company laws. The following list illustrates the emphasis of regulators on the development of new standards. Most laws require a substantial investment in education of the judiciary and legal profession, accountants, shareholders, directors and managers.

China:

The ‘Revised Company Law’ was adopted by the Standing Committee of the 10th National People’s Congress on 27 October 2005 and is in effect as of 1 January 2006.

Japan:

A draft of the new law was submitted to the Diet for deliberation on March 22 2005 and the new law is in force as of May 2006.

UK:

The Company Law Reform Bill was introduced in the House of Lords on 1 November 2005. 

Oman:

Oman is expected to enact a new company law by March 2006.

India:

The Expert Committee on the new Company Law presented its report to the Government on 25 May 2005.

Macedonia:

A new company law came into force in April 2004 that incorporates the latest OECD principles and that is harmonized with EU Directives.

Serbia:

The new Company Law was enacted on 22 November 2004 (Official Gazette of the Republic of Serbia no 125/04).

Taiwan:

The Legislative Yuan approved an amended Company law at the end of October 2001.

South Africa:

A Companies Bill is expected to enter the parliamentary process in January 2006.

Jamaica:

The Companies Act 2004 passed in the Honourable Senate on 4 March, 2004.

US:

The Sarbanes-Oxley Act was passed by Congress on 25 July 2002 and signed into law on 30th July 2002.

EU:

EU corporate governance action plan was launched in 2003.

Iraq:

A new Company Law/Order 64 has been adopted in 2004, which replaces Company Law Number 21 of 1997.

 

On the contrary, the regulatory impact assessment of the new companies act in the UK (the Companies Law Reform Bill) shows that with very few exceptions, existing companies “will not be required to do anything at the point when the new law comes into force or at any particular point thereafter” (DTI, 2005). The new bill focuses on deregulation and is expected to save businesses up to £250 million a year - including £100 million for small businesses.

Self-regulatory initiatives also require impact assessments. A study by Ernst and Young (2003) showed that implementation of the new Dutch Tabaksblat Code requires 15 working days for a small listed company and 40 days from managers and directors for a typical mid-sized listed company (Midcap company). Initial one-time costs are € 350,000 for a small listed company and € 1,000,000 for a mid-sized listed company. Annually, a small listed company would spend € 180,000 and a mid-sized company would spend € 450.000 on the voluntary implementation of the Code.

 

[18] Section 23(a)(2) of the Exchange Act and other legislative acts require the SEC to consider the impact that any new rule would have on competition and to determine whether an action is necessary or appropriate in the public interest.


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.