© 2011 Nature America, Inc. All rights reserved.
c o rresp o n d e n ce
institution slowing scientific progress.
Additional bureaucratic challenges may
be inevitable in an ethically contentious
and politically sensitive field, such as hESC
research, but policymakers should attempt
to mitigate these issues, by, for example,
encouraging institutions to accept third-party
provenance verification and providing clearer
guidance on hESC research not eligible for
federal funding.
Most of the hESC scientists surveyed
had access to only one or two hESC
lines, limiting their ability to conduct
comparative work or replicate their results
on multiple cell lines. Although access
issues are only one of several factors
creating this situation, both federal and
state12 funding agencies may want to
consider encouraging research using
multiple diverse hESC lines to improve the
reliability of research results.
The generalizability of these results
to other countries or related fields (e.g.,
induced pluripotent stem cell research) is an
important question worthy of investigation.
Regardless, the results reported here
support policy efforts to improve access
to hESC lines. Central repositories of
hESC lines linked with information hubs
containing key data about these lines, as
advocated by the Hinxton Group2, could
potentially simplify material sharing in this
field by simultaneously addressing concerns
about acquiring hESC lines themselves as
well as reliable information about these cell
lines.
Note: Supplementary information is available on the
Nature Biotechnology website.
ACKNOWLEDGMENTS
The author acknowledges financial support provided
by the Roadmap for an Entrepreneurial Economy
Program, supported by the Georgia Research Alliance
and the Kauffman Foundation, as well as support
from Georgia Tech. The author also acknowledges
research assistance from R. Karmali, pre-testing
assistance from T. McDevitt’s group, and helpful
comments on a draft of this article from J. Walsh, all
at Georgia Tech.
COMPETING FINANCIAL INTERESTS
The author declares no competing financial interests.
Aaron D Levine
School of Public Policy & Institute of
Bioengineering & Bioscience, Georgia Institute of
Technology, Atlanta, Georgia, USA.
e-mail: aaron.levine@pubpolicy.gatech.edu
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Sarbanes-Oxley overburdens
biotech companies
To the Editor:
As small and mid-cap biotech companies
are seeing their market values decline due
to the continued disruption in the financial
markets, the cost of compliance with US
governance regulations instituted over the
past decade, particularly those regulations
related to the 2002 Sarbanes-Oxley (SOX)
legislation, continues to increase at an
unabated pace. These regulations not only
are financially burdensome, but also impair
the ability of biotech companies to raise
much-needed capital. The bottom line is
that SOX has not produced the governance
improvements that offset the burden placed
on the biotech sector.
There is no doubt that investor trust
in the public markets needed to be
regained after the devastation caused by
the violations of the securities laws by
Enron (Houston), WorldCom (Jackson,
Mississippi, USA) and other corporate
household names. SOX’s lofty objective
was to fix, once and for all, the boardroom
shortcomings that gave rise to these
corporate failures. The SOX-mandated
incursions into the corporate governance
process of publicly traded companies, large
and small, was unprecedented—virtually
no aspect of corporate governance was
left untouched by Securities and Exchange
Commission (SEC; Washington, DC) and
stock exchange regulations: criteria for
director independence, composition and
responsibilities of the audit, compensation
and nominating and governance
committees, code of conduct and ethics,
disclosure pertaining to controls and
procedures, internal control over financial
reporting, employee whistleblowing,
and others relating to certifications by
executives, reports and filings.
These regulations, which intend to
protect the public from the fraudulent
conduct of several large companies,
represent a considerable burden for a
nature biotechnology volume 29 number 12 DECEMBER 2011
large number of biotech companies. They
are part of the reason that fewer biotech
companies are going public and instead
selling out to larger companies as a means
to provide exits for investors. Perhaps
even more importantly, once a biotech
company has gone public, the SEC and
stock exchange regulations impair further
capital raising.
For example, stock exchange rules
initially enacted to further corporate
governance restrict the amount of equity
securities a biotech may issue without
seeking prior shareholder approval. These
rules impair capital raising flexibility of
biotech companies, which continue to
struggle to raise capital. To get around
these restrictions, companies are then faced
with time-consuming legal contortions,
which often ultimately prove futile. At best,
financing is delayed for many months while
shareholder approval is attained, increasing
the risk that by then the opportunity to
acquire capital may have passed.
The apparent outcome of these
governance regulations has been to place
an undue burden on smaller companies—
whether biotech or otherwise—both in
terms of compliance costs and, perhaps
more importantly, by distracting
management and the board from the
business of the company. For the most
part, these companies must comply with
the same regulatory burdens as the larger
companies, even though they can ill afford
to bear them. Most biotech companies
have little or no revenues and as a result
have simple profit-and-loss statements.
Yet, boards must go through the same
audit committee meetings with the outside
auditors and management and otherwise
comply with other mandated requirements.
Governance-related proxy statement
disclosures have grown to the point
where readers are discouraged from
wading through them. Coverage includes
1081
©Boston Globe
c o rresp o n d e n ce
© 2011 Nature America, Inc. All rights reserved.
Eric Lander of the Broad Institute and MIT,
one of 26 thought leaders, industrialists and
entrepreneurs that make up the President’s
Council on Jobs and Competitiveness, which
supports amendment of SOX regulations.
specific disclosure about the relationship
of corporate performance to executive
compensation and the basis for executive
compensation levels, information about
the committees of the board and mandated
reports of the audit committee. The effect
is that these disclosures have become
regarded as boiler plates with investors
rarely focusing on them. A comparison of
the proxy statements from the 1980s with
those of today illustrates the substantial
burden placed on small, publicly traded
companies.
Although one may argue these
regulations benefit shareholders for large
companies, for small biotech companies,
they only impose unnecessary hardships.
As an example, it is not uncommon for
a company that has no revenues and a
market capitalization of $15 million to have
accounting, legal and compliance costs
aggregating over $1 million dollars per year.
In addition, the governance regulations
create some perverse results. As an
example, take the issue of director
independence. In many instances, the
stock exchange rules disqualify directors
with substantial shareholdings from
being classified as ‘independent’ and thus
preclude them from serving on key board
committees, such as audit, compensation
1082
and governance. Whose interest is better
aligned with the stakeholders—a director
whose only holdings constitute options
granted by the company as compensation
or a director whose investments runs into
the tens of millions of dollars?
Numerous other instances can be cited
to show that there needs to be a total
revamping of the current governance
regulations to address their considerable
shortcomings and tailor them to the true
needs of investors for the companies in
question.
In October, the President’s Council
on Jobs and Competitiveness (http://
www.jobs-council.com/) recognized as a
pernicious problem the burden on public
companies of pro forma compliance with
governance regulations that provide, at
a substantial cost, no material benefit to
shareholders. To reduce regulatory barriers
and provide financial incentives for firms
to go public, the council recommended
that the US Congress amend SOX to allow
small companies (market valuations <$1
billion) to opt out of SOX or exempt new
companies from SOX compliance for five
years after going public.
I vigorously support such changes to
corporate governance. Until some type of
regulatory relief is enacted, the continued
creep of governance and related disclosure
regulations on public biotech companies
will continue to have a detrimental impact
on the biotech sector without any material
benefit to investors.
COMPETING FINANCIAL INTERESTS
The author declares no competing financial interests.
Mark Kessel
Mark Kessel is at Sagent Advisors Inc., New York,
New York, USA and Symphony Capital LLC,
New York, New York, USA.
Disclaimer
The views and opinions expressed in this article are
solely those of the author and do not necessarily
reflect the views and opinions of the institutions with
which he is affiliated.
volume 29 number 12 december 2011 nature biotechnology
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