AIM and the Race to the Bottom

With Paulson suddenly promoting massive government intervention to save the housing market, we haven't been hearing much about deregulatory measures such as repeal of SOX. At the height of the anti-SOX fervor, some of the evidence marshaled to show the damage from the act included an ostensible decline in the number of foreign companies cross listing in the United States. Data showed that companies still obtained a cross listing premium if they listed in the US. Moreover, the NYSE and Nasdaq were more than holding their own in the listing battle with the London Stock Exchange.

It was, however, a different story with respect to the Alternative Investment Market or AIM. AIM essentially allowed small, often illiquid, companies to list without meeting any significant listing requirements. Most of the companies would be too small to list in the United States. Moreover, they are attracted to the London market at least in part by the regulatory lite approach of government regulators. In other words, the market consisted primarily of companies that couldn't list in the US because they were too small and wouldn't list in the US because they preferred to operate in a less transparent, less regulated enviornment.

With that in mind, we the latest study on AIM brought to our attention from our friends at Corporate Governance. PriceWaterhouse just put out a study on corporate governance standards on AIM and the results weren't pretty. The study concluded that companies on the whole had very low corporate governance standards. As the study noted:

• This survey shows that the composition of the Board is a particular area of weakness for many AIM companies. The need for strong independent non-executive director representation on the board appears to be something many AIM companies have yet to recognise. Perhaps linked to this, is the fact that only a fi fth of the AIM Top 100 reported that they had assessed their Board effectiveness. This fell to only 5% of the smallest AIM companies in our sample.

• It remains to be seen whether the current voluntary approach to governance is a sustainable model for AIM, especially when the evidence of this survey shows a relatively limited application of best governance practices, across all segments of the market. The challenge for every business is to get ahead of it’s competition. Simply meeting the minimum level of regulatory requirements is unlikely to satisfy the investor community and other key stakeholders. We believe this is particularly true of AIM with its relatively light regulation.

In other words, more evidence of regulatory lite. Growth in the number of listings does not necessary equate with investor protection or confidence.