Corporate Governance

Foreign Listings and the US: Sarbanes Oxley to the Rescue

By J. Robert Brown

How things have evolved.  Two years ago, the corporate governance debate was about the competitive harm of Sarbanes-Oxley (see Criticizing the Critics: Sarbanes Oxley and Quack Corporate Governance) and the need to restrict shareholder litigation in order to return the US to the pinnacle in global markets.  Pension plans, particularly union owned ones, were under attack, as were investment advisory services, those companies that could help guide institutional investors to vote their shares in a manner that was not automatically pro-management. 

One of the pieces of "evidence" used to support the declining importance of the US markets (due to SOX, excessive litigation, surly institutions, take your pick) was the decline in foreign listings.  This encompassed those companies formed in another country that chose to list on a foreign market.  Companies were, so some claimed, moving to London instead of New York because of over regulation.  It was a weak argument from the beginning but the study, Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time, pretty much put paid to the argument.  There was in fact no real decline, although the AIM Market in London gained a large number of listings that would never qualify to list in the US.  The premium that foreign companies got for listing in the US remained in place, evidence that companies came to the US specifically for its tougher corporate governance regulation.  London showed no similar premium.

We write not to reminisce about an overturned debate, although that would surely be a worthy exercise.  Instead, we note that the Journal has reported on Asian companies flocking to list in the US.  So far, five of the 15 IPOs in the U.S. this year have been from Asia and, while only one Asian public offering remains, "there is a pipeline of Asian companies preparing IPO paperwork behind the scenes with the U.S. Securities and Exchange Commission, according to bankers and lawyers."  Moreover, the types of companies that are deciding to list in the US include "newer, growth-oriented companies" such as those in the "health-care, clean-tech, or tech" industries. 

For profit stock exchanges like the NYSE and Nasdaq would no doubt like to reduce the regulatory barriers to listing in the United States.  Ironically, however, it is probably those very requirements that cause companies to come here.  If the NYSE/Nasdaq offered regulatory lite, there would be little difference between New York and London.  Companies that come to the US to obtain that badge of good governance and the resulting cross premium listing could just as easily go to the LSE.  All of which shows that a race to the top can be good for business. 

Full post as published by The Race to the Bottom on September 09, 2009 (boomark / email).