Keep America's edge

U.S. capital markets still rule. But with increasingly formidable global competition, we need reform to stay on top, says Fortune's Geoffrey Colvin.

By Geoffrey Colvin, Fortune senior editor-at-large

(Fortune Magazine) -- Should you care about another government report with a boring title from a group with a boring name? In the case of the "Interim Report of the Committee on Capital Markets Regulation," the answer is an emphatic yes. Why? You're an investor, and this document proposes changing the whole environment in which shareholders live and breathe.

Not everyone likes what it says. Crusading New York attorney general (and governor-elect) Eliot Spitzer called part of it "absurd." Plenty of other critics have lambasted it too, characterizing some of its assertions - that U.S. companies must be rescued from excessive regulation - as pandering to corporate interests. But for investors, most of what it proposes would be good news.

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The paper was produced by a group established in September at the suggestion of Treasury Secretary Henry Paulson, who has made no comment on the report itself. The premise is simple: America's capital markets are the envy of the world but are losing their preeminence. Non-U.S. companies are increasingly listing their stocks, doing IPOs, and otherwise raising money elsewhere. For the sake of the U.S. economy, we need to fight back and make our capital markets more attractive.

In a global economy, is such nationalistic thinking really necessary? You bet. Someday capital markets will most likely be one global web with a system of harmonized rules. Corporate governance worldwide will be at a uniformly high standard. And the question of where a publicly traded company is listed will seem irrelevant.

But we're not there yet, or even close. So, yes, U.S. competitiveness matters. Businesspeople with great ideas will want to raise capital in the most congenial markets, and investors like you and me will invest largely where we're most comfortable - at home. Americans still have a big stake in America's capital markets being the world's most attractive.

Of the report's many recommendations for holding on to that status, the best and most surprising concern shareholder rights: At companies where directors have staggered terms, boards would have to get shareholder approval for a poison pill - a management entrenchment device that no shareholder should favor.

Directors should need a majority of shares voted - even in uncontested elections, as most of them are - not just the single vote possible in today's Soviet-style polling. Those changes would reduce CEO power but would benefit shareholders.

We should also applaud the proposals for reforming the rules that govern federal prosecution of companies. I've railed about them before ("Will Your Boss Betray You?" July 24, 2006). Currently, if an employee is merely charged with a work-related federal crime, his employer must hang him utterly out to dry to avoid prosecution of the company.

Some of the recommendations would hamper the power of state law enforcers - those are what Spitzer called absurd, and I agree with him. State prosecutors should not need the SEC's permission to go after bad guys, as the report suggests.

But I agree with the committee that easing some of the most onerous Sarbanes-Oxley regulations - without amending the law - is worth considering. Strong regulation is essential to superior capital markets, but the most stringent approach isn't necessarily the best. Analogy: We could have the world's safest highways by imposing a nationwide speed limit of 20 mph - but nobody favors that because the benefits wouldn't be worth the costs.

For U.S. investors, the really good news in this report is its very existence. For 60 years after World War II, America didn't have to try to be the world's best capital market. There was nowhere else to go. Now there are lots of other options. Until we have that one great, harmonious global market, let's make non-U.S. markets work hard for what they get.

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