Veteran VC Tim Draper slams Sarbanes-Oxley as backlash builds in Silicon Valley to burdensome regulations

By Tom Foremski - May 6, 2005

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By Tom Foremski for SiliconValleyWatcher

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Tim Draper, veteran Silicon Valley venture capitalist (Draper, Fisher, Jurvetson), has hit out at the heavy burdens which the Sarbanes-Oxley Act and increased government regulations have placed on U.S. companies.

In an interview in “The Ledger” (an email newsletter published Thursday by his public relations company representative, Launchsquad), Mr. Draper states his suspicion that, when it comes to improving corporate governance, Sarbanes-Oxley (SOX) “will have the exact opposite effect that it intended.”

Mr. Draper is one of a very few speaking out publicly on this issue. Many CEOs have told me that “these regulations are killing us.” The requirements for compliance with SOX financial regulations are substantial, and can typically cost a company at least $2m extra in expenses. This, and health care costs, have become huge burdens and management distractions for both startups and large companies.

Mr. Draper says in The Ledger Interview that “Sarbanes-Oxley made it so that I have dropped off all my public boards, and so will many others. I suspect that it will have the exact opposite effect that it intended. Many good people will leave public boards.”


Larger companies are able to absorb the extra costs as a smaller percentage of revenues; but they still have to shoulder the extra corporate governance duties.

Intel, for example, has taken on the issue of corporate governance very seriously; chairman Andy Grove has been working on this issue for about two years, and made it his personal crusade. But it is incredibly distracting for top management; and Intel has to compete in a fast moving market, while juggling the timing of multi-billion dollar investments in chip factories.

Executive shame

One senior exec at one of the largest US tech companies told me that the corporate scandals had made him feel ashamed to answer a stranger’s question, while he was on vacation, as to what he did for a living.

He was very conscious that because he ran a public company he might be tarred by the same brush as the tiny criminal minority. He said that he knew his business community was honest; yet it was being punished through SOX, and that things had gone too far.

Despite this very common viewpoint, no Silicon Valley exec has stood up and said anything.


Will others speak out?

Silicon Valley’s business leaders, such as Andy Grove, Steve Jobs, Larry Ellison, John Chambers, Scott McNealy, Eric Schmidt, Meg Whitman, John Thompson, Gary Bloom and the others, should stand up and say that SOX regulations are not going to work unless changed; and that they are a competitive burden on Silicon Valley companies, and on the business of innovation.


Where's the beef?

Late last year Booz Allen Hamilton published a study on SOX that discovered: [From http://www.strategy-business.com/resilience/rr00014]

Here’s a fact that bucks conventional wisdom: more shareholder value has been wiped out in the past five years as a result of mismanagement and bad execution of strategy than was lost because of all of the recent compliance scandals combined.


This is a key finding of a recent Booz Allen Hamilton survey and analysis of the performance of 1,200 firms with market capitalizations of more than $1 billion for the five-year period from 1999 through 2003.

Consider the 360 worst financial laggards. Eighty-seven percent of the value lost by these firms was attributable to strategic missteps — management ineffectiveness in reacting to competitive pressures or forecasting customer demand — and operational blunders, such as cost overruns and M&A integration problems. Only 13 percent of the value destruction suffered by these companies was caused by regulatory compliance failures or was a result of poor oversight of company operations by corporate boards.

CFOs rushing for the exits

Board members are difficult to recruit, because of greater legal liabilities, and due to their increasingly becoming the targets of shareholder lawsuits.

Chief Financial Officers have also been hard to find; and C-level recruitment firm, Korn/Ferry, told SiliconValleyWatcher that CFO’s are calling up and saying “get me out of here, and into a private company.” There are an unprecedented number of CFO positions open at public companies, Korn/Ferry said.

CFO’s have to sign-off on the corporate accounts; and no one wants to be the test case, either for SOX compliance, or as a target for lawsuits.

See SiliconValleyWatcher post:

[BTW, The Ledger interview reveals Mr. Draper as a huge Arnie fan. But the California governor should be careful. Asked what else would he be doing if he were not a VC, Mr Draper replies, "I would be running for Governor. Or a poet".


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By Tom Foremski - May 6, 2005 | Permalink | Comment | Category: Tech Watch
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Comments (3)

Eric Schubert:

If you would like to read the full article, you can find The Ledger article at: http://launchsquad.com/email/newsletter_april_05.htm

Posted: May 6, 2005 5:16 PM

Dot Zon:

As an IT auditor doing Sarbanes work I find these complaints amusing because in my experience those who complain loudest have the most problems. I worked with many companies that grew from acquisition. This usually results in multiple financial systems often in global locations which compounds the problem. Let's remember we are talking about public companies that are raising capital through the public marketplace. How do they justify not being able to assure stockholders that they are confident in the veracity of the financial statements that they are making. So I don't have sympathy for them at all.

However, I must add that I have found that excesive costs have been driven by the auditing firms themselves. Some of this is greed but a great deal is just lack of experience. Too often non-critical systems or locations are included through some internal thought process that only the auditors understand. It is really the responsibility of public companies to come to grips with this and start to push back on the auditors regarding the following:
1. Assurance that critical accounts and locations are actually critical from a financial perspective.
2. "Your controls" are just that. Auditors can't dictate to you what the control in place should be. They can recommend a remediation if they feel the control you document is not effective but that in itself doesn't make for a material weakness. Stick to you guns and defend your controls.
3. Be carefull when they start pulling out the control statements that they think you should be able to make. Again, these are suggestions but not in themselve enforceable under the law. And, don't let anybody tell you that you need to be fully COBIT compliant. That just isn't so.

Posted: May 7, 2005 11:43 AM