Legend has it that noted bank robber Willie Sutton, when asked why he robbed banks, replied, ‘That’s where the money is.’ The same can be said of US securities markets, the largest in the world. By year-end 1997, the securities of an estimated 1,400 foreign companies from more than 44 countries were traded in US public equity markets. Even companies like Daimler-Benz and China’s Huaneng Power International have been willing to put themselves under US reporting requirements in order to access the vast and liquid US markets.
It is not only the size of US capital markets that lures foreign issuers, but the increased visibility and marketability afforded them. They can enter US markets in several ways: private placements (144A filings); unlisted or listed secondary trading (when stock is traded in markets but new capital is not raised); or a primary offering of new securities (when new capital is raised). The American Depositary Receipt (ADR) is the key trading instrument foreign companies use to enter US securities markets.
Non-US companies enjoy the following benefits when accessing US capital markets:
- a ‘stamp of approval’ from US regulators that certain reporting requirements are being met on a continuous basis;
- ease of trading and settlement for US investors who can avoid onerous home country trading and expatriation-of-profit rules;
- improved credit ratings since, even without large stock trading volume, listing in US markets tends to improve bond ratings which, in turn, improves cost of capital and its availability; and
- enhanced name recognition, corporate image and sales.
Dealing with US investors
These are some of the reasons for the tremendous growth in ADR programs in recent years (see table). But companies that decide to list in US markets must be prepared to deal with US institutional investors. And for many companies this may require a significantly altered approach to investor relations.
In the UK, Germany and France, for example, companies may be used to dealing with a relatively small group of highly informed bankers and analysts who shun proxy voting. Demands from US style activist institutions may come as a shock, as some go well beyond what are considered traditional boundaries. For instance, they may request meetings to discuss such things as strategy, board performance and evaluation processes, and executive and director compensation – not only with management, but with outside directors, too.
US public pension funds such as the California Public Employees’ Retirement System (Calpers) say they will take home country practices into account when evaluating governance issues. But US investors are increasingly asking for certain minimum standards, such as ‘one-share, one-vote’ (especially for new offerings), and a meaningful proxy voting mechanism which ensures appropriate information for the investor as well as the investor’s voting input.
ADR-listed companies, although not required to file earnings reports more often than in their home countries, may decide to do so as a means to improve communications and reduce the impact of profit warnings which may distort markets (if, for example, they are made during a six-month reporting cycle in lieu of a regular third quarter profit report). That’s just one example of the kind of approach non-US companies may choose if they want to access US capital markets and build investor confidence.
Dr Carolyn Kay Brancato is director of The Conference Board’s Global Corporate Governance Research Center
