httpv://www.youtube.com/watch?v=QZMOglfp76Q

President Bush nominated Washington University Law School professor Troy Paredes to the Securities and Exchange Commission yesterday. If confirmed by the Senate, Paredes would replace DealBreaker’s favorite SEC commissioner Paul Atkins. We’d feared that the loss of Atkins, who’s been a consistent critic excessive financial regulation, would be a blow to the SEC. But Paredes looks like a strong successor to Atkins.
Paredes, who is 37 years old, teaches classes on corporations, securities regulation, corporate finance, and the theory of the firm at the St. Louis school. His published work has focused on the political and psychological causes of excessive financial market regulation, as well as the psychology of corporate decision making. The choice has been endorsed by Larry Ribstein, a professor at the University of Illinois College of Law and the author of the Ideoblog.
Paredes has written that the SEC’s decision to require hedge fund managers to register with the commission—a policy which was later struck down by the federal courts—may have been a reaction to the accounting scandals of the late nineties. The commission “did not want to get caught flat-footed and criticized again” after taking a beating from following the collapse of Enron and WorldCom. In an era when everyone seems to have their own pet plan of new regulations following the subprime disaster, this sounds like exactly the kind of approach we need on the SEC.
We fully expect that Paredes will come into criticism from people whose tacit assumption is that only enthusiasts for regulatory growth should be placed in positions of power at regulatory agencies. Bush is right to ignore this question begging approach by appointing an insightful critic.

Bush Nominates Law Professor Troy Paredes To SEC [Dow Jones Newswires]

Implementing the “internal controls” provisions of Sarbanes-Oxley has been immensely costly for publicly held businesses in the United States while the concrete evidence of it’s benefits has been scant. By some estimates, the direct costs of implementation are as high as $35 billion each year. And the real costs might be even higher. Nonetheless, because non-compliance with Section 404 can be disastrous for a public company due to regulatory sanctions and massive stock declines, companies continue to spend and spend to implement Section 404.
It’s clear the regulation is broken but we’re unlikely to be rid of it any time soon. The regulation’s defenders insist the regulation is helping us avoid the kind of accounting scandals we saw in the late nineties, and that government enforcement of the regulation is necessary because the market can’t be trusted to regulate itself. There’s some truth in this argument: the market won’t necessarily price internal controls over financial accounting at the price regulators think is appropriate, much less at some level that optimizes efficiency over the long term.
But it’s a half truth because it rests on a double standard. It insists we focus on the reality of imperfect markets but not notice the reality of imperfect government. There’s no evidence that the government has arrived at the right level of internal controls, or that it can efficiently police this regulation.
Yesterday we got a reminder of the reality of imperfect government when the General Accounting Office declared that the Securities and Exchange Commission had a material weakness in the internal controls over its own financial reporting. This is a serious blow to the SEC’s credibility, which avoided getting tagged with the “material weakness” finding last year only by promising to improve things. But things haven’t improved. Indeed, they may now be worse.
Fortunately for the SEC, there is no market accountability for government agencies. You can’t short the SEC, and lawmakers are unlikely to penalize the commission by denying it authority or funds. Indeed, we expect that this GAO finding will somehow become an argument for the SEC to get more funding. That’s the way it works in our nation’s capital: failure is only evidence of the need to get more of the people’s treasure.
And for those of you who miss the irony of this we’ll make it clear: the SEC is the agency charged with enforcing Section 404 on public companies. Of course, no government agency has ever let the glass facades of its own house prevent it from throwing stones.
SEC Flunks Internal Controls Audit [CFO.com]

Sometime in the next few weeks, Securities and Exchange Commission chairman Chris Cox will likely have to decide how he will vote on a pair of competing rules on shareholder access. One “proxy access” rule would shift power from boards of directors to cliques of outside shareholders by permitting certain shareholders and groups of shareholders to include in company proxy materials proposals for amendments to bylaws that would mandate procedures to allow shareholders to nominate board of director candidates. The other preserves longstanding rules that make it difficult and costly to for dissidents to mount proxy fights.
The SEC’s commissioners are evenly divided along partisan lines on the question. The Democratic commissioners favor increased proxy access. The Republicans favor the status quo. Cox holds the deciding vote. Which way will Cox vote? We’re not in the predictions game. But if we take Cox at his word about his own agenda at the SEC, it seems clear that he should vote against the new proxy access rules.
After the jump, we look at how the new proxy access rule hurts ordinary investors.

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Securities and Exchange Commission Chairman Chris Cox holds the swing vote in one of the most important questions of corporate control currently being considered by the government. Sometime soon he’ll have to decide whether to support the proxy access proposals put forward by the Democratic commissioners or cast his lot with Republican proposals to maintain the status quo.
As is so often the case, at the heart of the matter is a confused concept. In particular, the concept of shareholder democracy seems to have broken out of its academic box and run rampant through the minds of some otherwise sensible people. Fortunately, the proxy access proposals are the subject of two of the most important articles published today—one from law professor Lynn Stout in today’s Wall Street Journal and the other from Larry Ribstein on Ideoblog.
Stout takes the argument for shareholder democracy head on, arguing that the “proposed proxy access rule is driven by the emotional claim, unsupported by evidence, that American corporations benefit from ‘shareholder democracy.’” Current shareholders, who are only temporary owners with easy entrance and exit strategies, have incentives to exploit and loot a company for immediate gains—which is exactly what some well-known activist shareholders have been urging on public companies. A stronger shareholder franchise will only acerbate the problem, Stout says.
What makes US companies function so well is the fact that they are managed by strong central boards and run by powerful managers. “Successful corporations are not, and never have been, democratic institutions. Since the public corporation first evolved over a century ago, U.S law has discouraged shareholders from taking an active role in corporate governance, and this ‘hands off’ approach has proven a recipe for tremendous success,” Stout writes.
Ribstein is less enthusiastic about traditional models of corporate governance. In fact, he thinks that the traditional public corporation may be on its way out—or at least in for some real evolution. But he agrees with Stout that attempts to force change on corporations through a new national regulation on proxy access are a very bad idea. “[T]he reason why the SEC should keep its hands-off here has more to do with the appropriate limits of SEC power than with the substance of the proposal. This is a matter of internal corporate governance which should be for the states,” Ribstein writes. “There is no justification for making this a federal matter unless you buy in to the shareholder democracy myth.”
What neither Ribstein nor Stout touch on today is the actual mechanism for the disfunction of shareholder democracy. Both understand that it won’t work as promised but they don’t spell out the reasons why. But fortunately you read DealBreaker, so you are about to learn why.
Clearing up the puzzle of shareholder democracy after the jump.

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