THE RATIONALE BEHIND CROSS-LISTING: ITS IMPLICATIONS ON CORPORATE GOVERNANCE

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:

1. Why companies decide to cross-list their shares on foreign stock markets;
2. What are the most common definitions and parameters of Corporate Governance; and
3. What are the implications of cross-listing on companies’ corporate governance practices. 

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: 

• Financial gains:  Cross-listing is a principle source of corporate financing, and one of the main reasons for a company to cross-list its shares on a foreign stock exchange is raise capital funds at a lower cost compared to debt financing.  This arises because their stocks become more available to foreign investors.  Their access to these stocks may otherwise be restricted due to international investment barriers, which hinder them from accessing particular markets.
• Increased Liquidity:  Cross-listing enables companies to trade their shares in numerous time zones and multiple currencies.  This increases the issuing company’s liquidity and gives it more ability to raise capital.  It has been proven that there is a correlation between share valuation and market liquidity². 
• Shares Marketability:  Cross-listing assists companies to expand their shareholders base “as it brings foreign securities closer to potential investors”.  This makes the company’s securities visible or recognised in the foreign market, enabling the company to access additional cash, if required, by selling debt in the foreign market³. 
• Marketing and Growth Motivations:  Cross-listing in a foreign country will assist the issuing company in its marketing and cross border expansion plan, as the company’s brand and its products will be identifiable to investors and consumers of the foreign countries, creating new distributing channels and export opportunities. 

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:

• “Corporate governance is the process by which companies are directed and controlled” ⁴ 
• “Corporate governance is the relationship between various participants in determining the direction and performance of corporations.  The primary participants are the shareholders, the management and the board of directors” ⁵ 
• “the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment” ⁶

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:

1. it will be subject to the corporate governance laws and regulations applicable in the US, which imposes more stringent disclosure requirements.
2. it will be subject to the analysis of financial institutions like underwriters, auditors, valuers and/or debt rating agencies.  This will of course be coincided with high level of disclosure requirements.
3. it will be subject to increased securities analysis, which means that future income forecasts will be calculated more accurately.
4. In conclusion, companies should consider and take into account all the implications which are associated with their decision to cross-list their shares on one of the well-developed stock markets.  This would include stringent disclosure requirements, abiding by takeover rules, applying well advanced corporate governance rules and the costs that will be associated with the application of these rules, separation between ownership and management etc. 

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.

Footnotes:

1. P Stephen, A Kenneth, and N Gregory, ‘the effect of cross listing on corporate governance: A review of the international evidence’ (2009) 17 corporate governance: an international review.
2. A Licht, ‘cross listing and corporate governance: Bonding or avoiding’ (2003) 4 Chicago Journal of International Law 122. 
3. A Licht, ‘cross listing and corporate governance: Bonding or avoiding’ (2003) 4 Chicago Journal of International Law 122. 
4. The Report of the Committee on the Financial Aspects of Corporate Governance and the Code of Best Practice- Cadbury Report. 1992 
5. R Monks, and  N Mindow, Corporate Governance (4th edn, Wiley1994).
6. A Shleifer and R Vishny, ‘A survey of corporate governance’ (1997) 52 Journal of finance 737.