Companies incorporated under emergent local corporate governance regimes may benefit from cross-listing their securities on one or more of the well-developed capital markets in order to enhance their corporate governance practices. In principle, companies with cross-listed shares will have to follow and abide by the corporate governance rules adopted by the well-developed stock market.
Typically, western stock markets (such as London Stock Exchange “LSE” or New York Stock Exchange) apply more stringent corporate governance and disclosure requirements compared to the stock markets in the Middle East.
In addition, cross-listing of shares will provide the companies in question with a high level of liquidity and expose them to different pricing and valuation mechanisms.
This article aims to shed some light on the implications of shares’ cross-listing on the corporate governance practices of the cross-listed companies and addresses the following:
Why companies decide to cross-list their shares in foreign stock markets
By way of introduction, cross-listing is defined as a “process by which a firm incorporated in one country elects to list its equity on the public stock exchange of another country”1.
The principle considerations that drive a company’s decision to seek a cross-listing of its shares on one or more foreign stock exchanges are:
What is the most common definitions and parameters of Corporate Governance
Everyone dealing with a company, whether as shareholder, stakeholder (suppliers, distributors, agents etc.) or director wishes it to be well managed, or at least managed for their own benefit. Of these, the only group actually in a position to ensure that the company is managed for their own benefit are the directors. In the meantime, the only group who can control the directors and monitor their performance are the shareholders. By corollary, the relationship between the shareholders and directors is of great importance. Such relationship is the subject matter of corporate governance rules.
The term Corporate Governance has been defined in a number of different ways, however, all of these definitions describe the issues relating to how companies are managed or controlled. These definitions include, inter alia, the following:
The definitions given to the term Corporate Governance vary depending on the perspective from which the same is defined; some consider corporate governance to be concerned mainly with the activities of shareholders and the management. While other perspectives focus on how corporate governance is practiced, and the role of other players such as the external auditors, regulators, and financiers.
The widest perspective when defining corporate governance takes account of all elements that influence the exercise of power over companies. Accordingly, the scope of corporate governance includes the structure of the governing body of the firm, the relationship between the shareholders and the financers, the effect of listing the company’s shares and the company’s relationship with the contractual and non contractual stakeholders.
What are the implications of cross-listing on companies’ corporate governance practices
By cross-listing its stock on the exchange of another nation, a company can effectively choose the level of protection and regulation it provides to its investors. In this regard, the cross-listed company will commit itself to the mandatory corporate governance requirements applicable at the well-developed foreign stock markets. For example; if a company decides to cross-list its equity on one of the US exchanges, the company in question will enhance its corporate governance practices due to the following:
Companies should think ahead before taking a decision to cross-list their shares on a well-developed stock market and prepare themselves to comply with the auditing, reporting, and risk management systems which other companies apply in order to be qualified to meet the standards of developed markets.
This article first appeared in the September 2013 edition of ta’ameen Qatar magazine.