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Foreign companies and competition for capital

The opportunities and challenges of raising capital in Western markets are finely balanced, as Jonathan Passmore describes.

Companies domiciled in foreign markets with listings in the UK and America, or plans for depositary receipt programmes are on a steep learning curve when it comes to understanding the needs and foibles of Western institutional investors.

Having learned the importance of comprehensive financial disclosure they are realising that, far from solving the investor relations riddle, there is much more to be done.

It’s fair to say, however, that the behavior ‘gap’ between foreign and domestic companies in Western markets has shrunk rapidly, as local companies confront a market environment that is increasingly demanding, intolerant and vocal. But the issues aren’t necessarily the same.
Interestingly, ‘Say-on-Pay’ is less of an issue in the more conservative Asian markets where the prestige of leading a company or the value of controlling stakes make executive compensation less divisive. Time will tell, of course.

But the general topic of corporate governance is under intense scrutiny today, as companies and, more significantly governments and their agencies work harder to bring their corporate identities up to scratch. Some of the crucial topics under consideration today include independent directors, communications, and proxy voting.

For example, many Asian companies, like less progressive Western institutions, have boards populated with former company executives – hardly a forum for forthright discussion and rigorous analysis and the more progressive companies know it. The temptation is to appoint a couple of ‘independent’, external directors, usually academics or retired executives from well-known firms.

While a step in the right direction from a credentials perspective, having only 15% to 20% of a board willing and enabled to challenge management policy is inadequate. More needs to be done and regulatory bodies such as METI in Japan, which is actively engaged in encouraging higher corporate governance standards across the country, recognize this problem and are using their considerable influence to effect more change. 

Hard work is also being done to improve communications, long a difficult area for companies unfamiliar with the demands of aggressive shareholders. The more enlightened companies that seek core investors overseas are responding to the challenges posed by differences in language, culture and regulation, taking important steps to modify their approach. These companies, like many of their Western counterparts, are sensing how institutional investors are increasingly choosy in their stock selection, and that if they want reliable, long-term shareholders, they have to raise their game.

The topic of communication is broad and deep and the better companies are improving everything, from websites to linguistic skills, roadshow documents and shareholder outreach programmes. One area of special attention is the annual meeting, which in Japan, for example tends to fall on the same day, for everyone. That’s right, hundreds of companies holding their AGMs on the same day – quite a challenge for an increasingly engaged and demanding investor.

Beyond a historic background of shareholder passivity, Asian companies are increasingly aware that strong shareholder relationships can provide more than capital and safe votes. The furore over executive compensation in the UK this AGM season is being watched very carefully, for what it says about corporate behaviour, board responsibilities and potential shareholder activism.

Alignment of interests is a core principle of capitalism and it is fascinating to observe how traditional alignments have shifted over the last two or three decades.

In his excellent book Fixing the Game: Bubbles, Crashes and what Capitalism can learn from the NFL (Harvard Business Review Press), author Roger L Martin illustrated how a major US company ranked its constituents in order of importance. The company believed that its responsibilities were: to its customers; its employees; the communities it served; and fourth, shareholders. He goes on to point out how those alignments have shifted over the last 20 years with the shareholder, at some companies, ranking first. That change has been prompted by increased engagement by shareholders in pursuit of value-add policies that have driven share prices higher, but sometimes at the expense of long-term progress. Compensation packages dominated by RSUs and stock options have encouraged that alignment of interest between the executive suite and the shareholder.

How curious then that this relatively recent arrangement has shifted again, if we consider recent protests against pay awards at several major UK companies. Massive compensation packages, seemingly regardless of company performance, are moving two major constituencies out of alignment. And when employees and the communities in which they live and work are disrupted too, the attention on this new misalignment is greater still.

Regardless of how Say-on-Pay disputes are resolved, companies in Asia and the West must guard against a more significant breach in the relationship with their shareholders. Changes in the investment industry in response to technology, the demands of investors and shifts in regulation require an appropriate shift in corporate attitudes and behaviours.

Asian companies are increasingly keen to tap into the massive amount of investment capital available in the Western markets and, as we have seen in the industrial sector, are very fast learners.  

Published: 11 August, 2016