When reputation trumps regulation

A history of strong business relationships and good governance tactics can help international companies seeking cross-listing in US markets to overcome investors' concerns about lax regulatory supervision at home, says Harvard Prof. Jordan Siegel. His research into the performance of Mexican companies during and after the financial crisis of the mid-1990s suggests that international firms can win the confidence of US analysts, financiers and bankers.

The evidence ... would suggest that investors should place greater trust in those cross-listed firms that have built up a reputation for good governance through bad economic times. Firms with reputational assets have a strong positive incentive to continue to live up to those reputations.

Firms with reputational assets are able to secure privileged access to outside finance as a result of their reputation. They may also enjoy other market benefits from their reputation as well (such as with customers and business partners).

However, Siegel's research also shows that cross-listed firms can be pillaged by less reputable international partners. In some cases, roadshows fail because management doesn't understand the depth of information regularly expected by international investors. In China, public relations firms have built a thriving practice by providing basic investor relations advice to Chinese firms looking for international investors:

But the basics of investor relations confuse many Chinese companies. "They have to be more proactive in their disclosure with shareholders than they might otherwise be inclined," says Phil Lisio, director of investor relations at Ogilvy PR in Beijing.

In some Chinese companies, PR campaigns amounted to little more than filing financial details to local stockmarkets and placing advertisements in local financial journals. Press conferences and roadshows were rare.

"In the past, investor communications is the thing you wrote a memo to the government about. You didn't have to sell your story to multiple investors," says Mark Hynes, director of investor relations at Xinhua PR Newswire, a joint venture between state-owned Xinhua news agency and British PR firm United Business Media.

... Old communications habits of set-in-their-ways CEOs take time to change. Anne Lui, vice-president of the financial communications group at Omnicom Group's Ketchum Newscan, recalls working with the chief executive of one Chinese manufacturing company. He hired her on the advice of an investment bank, but he didn't want to participate in the investor roadshows that she organized.

"Because he has such a high status within the industry and the organization, he thought 'Why do I have to care about those investors? They are so young and don't know about my industry'," says Lui. "It was a cultural shock for him."(Far Eastern Economic Review, sub. req.)