1.1. KEY ISSUES IN INTERNATIONAL BUSINESS FINANCE 9
The same holds for disclosure requirements once the stock has been launched,
and the whole issue of corporate governance. The big issue here is how to avoid man-
agers selfdealing or otherwise siphoning off cash that ought to be the shareholders’.
Good governance systems contain checks and balances, like separation of the jobs
of chairman of the Board of Directors andCEO; a sufficient presence of independent
directors on the Board; an audit committee that closely watches the accounts; com-
prehensive information provision towards investors; a willingness, among the board
members, to fire poorly performingCEO’s, perhaps on the basis of pre-set perfor-
mance criteria; a board that can be fired by the Assembly General Meeting in one
shot (as opposed to staggered boards, where every year only one fifth comes up for
(re)election, for example); and aAGMthat can formulate binding instructions to the
Board and theCEO. Good governance also requires good information provision, with
detailed financial statements accompanied by all kinds of qualitative information.
But governance is not just a matter of corporate policies: it can, and ideally
must, be complemented by adequately functioning institutions in the country. For
instance, how active and independent are auditors, analysts (and, occasionally, news-
paper reporters)? Is a periodic evaluation of the company’s financial health by its
house bank(s), each time loans are rolled over or extended, a good substitute for
outside scrutiny? Are minority shareholders well protected, legally? How stringent
are the disclosure and certification requirements, and are they enforced? Are there
active large shareholders, like pension funds, that follow the company’s performance
and put pressure onto management teams they are unhappy with? Is there an active
market for corporate officers, so that good managers get rewarded and (especially)
vice versa? Is there an active acquisition market where poorly performing com-
panies get taken over and reorganized? Again, on all these counts there are huge
differences across countries, which makes it impossible to set up one world stock
market. TheOECDhas been unable to come up with a common stance on even
something as fundamental as accounting standards. Telenet, a company discussed
in a case study in Part IV, has three sets of accounts: BelgianGAAP,US GAAP, and
IFRS. Even though in theusits shares are only sold to large private investors rather
than the general public, Telenet still had to create a special type of security for the
usmarkets.
In short, markets are differentiated by regulation and legal environment. In addi-
tion, companies occasionally issue two types of shares: those available for residents of
their home country, and unrestricted stocks that can be held internationally. Some
countries even impose this by law. China is a prominent example, but the list used
to include Korea, Taiwan, and Finland/Sweden/Norway. Typically, only a small
fraction of the shares was open to non-residents. Other legislation that occasionally
still fragments markets is a prohibition to hold forex; restrictions or prohibitions on
purchases of forex, especially for financial (i.e. investment) purposes; caps on the
percentage of mutual funds or pension funds invested abroad, or minima for do-
mestic investments; dual exchange rates that penalize financial transactions relative
to commercial ones; taxes on deposits by non-residents; requirements to invest at
zero interest rates at home, proportionally with foreign investments or even with