Sarbanes-Oxley has had a minimal impact on ADR issuers. Or so suggests a survey of 143 ADR issuers by Broadgate Capital Advisors (a unit of Broadgate Consultants) and The Value Alliance in conjunction with the Bank of New York. According to the survey, only 8% of respondents believed that the Sarbanes-Oxley Act’s requirements will cause them to reconsider US market participation. In fact, only half of those surveyed believed the US has more rigorous governance practices than their company’s home country.
The 143 respondents represented companies headquartered in 43 different countries (48% in the European Union) and with market capitalisations predominantly in excess of $500 million. The New York Stock Exchange was the exchange where most respondent companies’ ADRs are traded (51%), followed by 33% that were unlisted, OTC or 144A issues. Thirty-two percent of issuers surveyed had greater than 5% of their daily share volume traded as ADRs.
ADR issuers are complying with US corporate governance standards, according to the survey. Thirty-two percent of the respondents said they voluntarily follow Regulation FD and uniformly share all communications with shareholders. Ninety-four percent said they either have or plan to install the necessary internal controls that meet Sarbanes-Oxley standards even though some of the respondents may not be required to comply.
In addition, some ADR issuers have adopted policies related to activist shareholders that many in the U.S. would consider advanced. Twenty-seven percent of the respondents hold ad hoc meetings with shareholders; 17% hold regular meetings with selected shareholders to discuss governance issues; 7% encourage proxy initiatives from shareholders on compensation, issues of social responsibility and disclosure; and 6% allow proxy access for director nominations from shareholders. Contrary to common practice in the U.S., only 1% of survey respondents said they lobby to circumscribe shareholder rights and prevent additional legal powers. Finally, 82% believed that financial transparency is very important to the performance of their stock – only 2% believed that it was not.
Are US regulators sensitive to ADR issuers’ concerns? Nearly 40% of the survey respondents said that US regulators are sensitive to non-US issuers, while 39% did not think so and 23% weren’t sure. Maybe that’s why, when asked what they were doing to express their views on governance to U.S. regulators, 53% said they are taking no action; 15% are actively corresponding directly with US regulators; 11% are joining lobbying groups; and 8% are using PR/IR firms.
Regarding director and officer liability, the respondents were less sanguine. A full 61% of respondents said that director and officer liability in the US is a greater concern to them than in their home country.
Some ADR issuers believed there would be convergence of U.S. and global governance standards. According to the survey, 50% said that US corporate and global governance standards will be the same, or almost the same, in 5 years while only 4% believed the standards will be very different.
In addition, nearly 90% would welcome a move by the Financial Accounting Standards Board to conform U.S. accounting standards to those of the International Accounting Standards Board.
“I was impressed by the respondents’ broad recognition of corporate governance issues and their desire to do the right thing as reflected in their attitudes toward shareholders, internal controls and financial transparency,” says Eleanor Bloxham, a governance expert and President of The Value Alliance.
“The recognition of the importance of financial transparency – and their view regarding the convergence of financial reporting standards – show that ADR issuers expect that future governance practices will be enhanced and more uniform,” adds Jim Simpson, a Partner with Broadgate Capital Advisors.
Christopher J. Sturdy, managing director and head of The Bank of New York’s ADR division added, “It is encouraging that the survey showed ADR issuers are not likely to exit the US market due to recent corporate governance reforms. In fact, there is clearly a strong desire to maintain and improve their presence in the U.S. market and to engage with U.S. shareholders.”