28 December 2018

Harvard Law School Forum: Stock exchanges and shareholder rights - a race to the top, not the bottom?

The shared interests between institutional investors and exchanges suggest the importance of the investment and stock exchange communities maintaining and building mutual understanding to address common interests, such as overcoming short-termism in financial markets, writes ICGN Policy Director.

In many areas, investors and stock exchanges are aligned in their views about promoting the health of financial markets, the protection of investors and the corporate governance of listed companies. But there are also potential areas of disconnect.

There are clear areas of shared interest between exchanges and investors. Both the investor and stock exchange communities promote sustainable value creation — for individual companies and the integrity of the market as a whole.

The public listing of companies is a social good, and contributes to the benefit of companies, as users of capital, and investors, as providers of capital. To this end exchanges play a particularly important role for investors in supporting good corporate governance through their listing and disclosure standards as well as their monitoring of for market abuse or manipulative trading.

At the same time the stock exchange and investment communities share a common concern with regard to the diminishing number of listed companies, particularly in Anglo American market economies such as the US and the UK.

In spite of shared common ground between investors and stock exchanges, there is scope for misalignment. This potential is greatest in the case of for-profit exchanges, who themselves are listed companies. In earlier days, when the leading stock exchanges were mutual organisations, collectively owned by the brokerage community, exchanges were not operated as vehicles for capital gain. Now that this ownership model has shifted, particularly among the world’s largest exchanges, it has become a very competitive sector, with exchanges around the world competing with one another to generate revenue both for listings and for a range of information and transaction services.

ICGN and the investor community more broadly regard dual class shares negatively—insofar that they can entrench management, diminish external accountability and marginalise minority shareholder rights. The linkage of this issue to stock exchanges comes with regard to investor concern that some stock exchanges may be compromising listing standards relating to dual class share offerings as a competitive tactic to attract new listings. This represents a fundamental conflict of interest between investors and the stock exchanges with dual class share offerings.

The G20/OECD Principles of Corporate Governance makes only limited reference to stock markets, primarily their role of listing requirements and “fair and efficient price discovery. The specific concerns over dual class shares and high frequency trading suggest there are broader consideration as well, and will continue to remain areas of debate, and possible contention, between exchanges and investors.

Full article

© Harvard Law School Forum on Corporate Governance and Financial Regulation