J Bus Ethics
DOI 10.1007/s10551-014-2151-6

When in Rome: How Non-domestic Companies Listed in the UK May Not Comply with Accepted Norms and Principles of Good Corporate Governance. Does Home Market Culture Explain These Corporate Behaviours and Attitudes to Compliance?

Peter Rejchrt •    Malcolm Higgs

Received: 31 August 2013 / Accepted: 10 March 2014
© Springer Science+Business Media Dordrecht 2014

Abstract Non-domestic companies  are  increasingly present on the London Stock Exchange. Such companies have specific governance requirements. They may seek to access capital in a more liquid market and to diversify ownership. The reputational ‘bonding’ (Coffee, Northwest Univ Law Rev 93:641–708, 1999; Columbia Law Rev 102:1757–1831, 2002) to a prestigious exchange should be a statement to the market of a propensity to disclosure and a willingness to protect minority shareholders. Yet, many non-domestic companies retain tightly controlled share- holding structures and are based in emerging regions where national culture norms differ to the UK. We hypothesise that non-domestic companies are likely to be less compli- ant with the principles of the UK Corporate Governance Code and suggest a correlation between lower levels of compliance and non-domestic companies from countries that demonstrate high power distance in the Hofstede (Culture’s consequences: International differences in work- related values, 1980a) cultural value framework. We find some encouraging signs of compliance with the reigning governance code principles in Board structures. However, we find only partial compliance in leadership and Board effectiveness measures in those companies from cultures high on the power-distance scale. Further, we include analysis into ownership characteristics and find companies

P. Rejchrt (&) · M. Higgs
Southampton Management School, University of Southampton,
Highfield,  Southampton SO17 1BJ, UK e-mail: pkr106@soton.ac.uk
M. Higgs
e-mail: m.j.higgs@soton.ac.uk

from emerging markets are dominated by a single or con- trolling group of shareholders, which is likely to impact on attitudes to compliance and is particularly evidenced in terms of Board structures with no executive directors or led by an  executive Chairman.  Much of  the prior research effort into the levels of compliance with the UK’s ‘comply- or-explain’ approach to governance has produced mixed results and focused on all companies. In our exploratory approach to analysing only the non-domestic subsample, we report some evidence linking cultural distance to lower levels of compliance with the UK standards. We develop a framework to guide future research into the context and cultural underpinnings of this sub-sample of companies, hypothesising that frequent market capitalisation-induced index changes may divert attention away from any poten- tial compliance issues. On the one hand, our evidence is encouraging for governance regimes based on voluntary compliance disclosures such as the UK and similar Euro- pean and international markets, as we report partial com- pliance with the principles of the current governance code. Our research may, however, be helpful in guiding future versions of the UK governance framework and other international governance regimes adopting the ‘comply-or- explain’ approach and in setting policy to improve dis- closure. It contributes to the understanding of the specific context of non-domestic companies and any cultural ten- dencies to non-compliance. By demonstrating evidence of lower levels of compliance with key principles of the Code by non-domestic companies, we present a framework enabling lawmakers to further improve corporate gover- nance codes.

Keywords    Governance · Non-domestic · Hofstede · Cultural value dimensions · Compliance · Agency · UK · Comply-or-explain

Introduction

The globalisation and integration of international financial markets (Baker et al. 2002; Cetorelli and Peristiani 2013) reflect the desire by individuals to diversify their investor portfolios and by companies to seek international expan- sion and demonstrate a willingness to adhere to more rig- orous compliance regimes. National culture impacts organisational behaviour (Friedland and Alford 1990; Hickson and Pugh 1995; Naor et al. 2010) and frames our research context, as culture underpins governance and how companies approach compliance monitoring (Licht 2001b; Sison 2000). We note the significant penetration of non- domestic companies on the London Stock Exchange (LSE) and hypothesise that such companies may have less focus on compliance with corporate governance codes in their adopted market due to cultural divergence (Doidge et al. 2009b).
Yet despite the increased globalisation of the business environment, economic theory remains firmly grounded in the Anglo-American approach to capitalism. Such an Anglo-dominated view of industrial organisation is based on agency theory, whereby control systems need to be in place to control excess risk taking by managers, who are not simultaneously owners of capital (Jensen 1993; Shleifer and Vishny 1986). Hollingsworth et al. (1994) suggest that such governance mechanisms are external (financial mar- kets) or internal (hierarchical structures designed to miti- gate the agency problem). There is ‘no accepted theoretical framework for comparing systems of corporate governance within or between cultures’ (Demb and Neubauer 1992,
p. 9). Much governance research has failed to address the cultural implications for governance where the Anglo- American model of capitalism is not the dominant ideol- ogy, for example, where the ‘values consensus’ (Hol- lingsworth et al. 1994) relies more on social and/or political networks than on mandated and regulated rules- based systems of organisation (Hollingsworth and Lind- berg 1985).
Finance, economics, law and strategy provide a frame- work for this research (Bebchuk and Weisbach 2010). We incorporate an international business perspective, whereby national governance frameworks are influenced by cultural norms and societal values (Strange et al. 2009). This reflects the societal and institutional context of micro-level decision making of businesses (Dunning and Lundan 2008). Agency theory (Fama and Jensen 1983a, b; Jensen and Meckling 1976) remains the dominant paradigm in corporate governance research and sets the organisational context of our research. We consider the governance implications of non-domestic listings, by examining the effectiveness of internal mechanisms of control through compliance  with  the  principles  of  the  UK  governance

framework. Agency theory further sets the standard for companies, particularly from emerging markets, to ‘bond’ to the higher standards of regulation more rigorously enforced on prestigious exchanges such as the LSE (Coffee 1999, 2002). Since institutional change tends to occur slowly, companies from emerging markets may prefer the ‘bonding’ option to demonstrate to international investors a desire to adhere to more rigorous governance standards. Such a move is both quicker and more effective in addressing the shortcomings of the home country gover- nance regimes (Aguilera and Jackson 2003; Peng 2003).
We gather data on non-domestic companies listed in the UK FTSE 350. The continued attractiveness of the LSE as a listing bourse, with non-domiciled companies pursuing full ‘premium’ Main Market listing (LSE 2012), is illus- trated by the increased weighting of mining companies from emerging markets representing 14 % of the large market capitalisation FTSE 100 index in 2011 from 10 % in 2007 (Burgess 2011). Our research shows there are now non-UK-domiciled companies in 21 sectors, predominantly in exploration and mining, accounting for market capi- talisation of almost GBP500bn. This is a probable reflec- tion of the prestigious reputation of the LSE and strong financial infrastructure (Cetorelli and Peristiani 2013) and presents an alternative view to recent US research showing reduced volumes of cross-listings (Doidge et al. 2009a; Karolyi 2012). We note a shift in the domiciles of com- panies seeking a listing on the LSE to emerging markets, which we define by the market structure of an under- developed institutional framework rather than economic measures such  as GDP per  capita  (Khanna and  Palepu 2010). In particular, this global shift to the east and the south may have implications for compliance. Companies from these markets continue to seek the benefits of adopting stricter governance standards, but are likely to be culturally associated in their domestic environment with weaker regulatory regimes (Hoskisson et al. 2013), strong leaders (Moore et al. 2010) or dominant shareholders (Claessens et al. 2002).
The increasing non-domestic presence on the LSE and a dearth of recent research into the UK context is the gap we identified in the current literature. Whilst the primary focus of our research is on internal governance, we contribute to theory development by incorporating an environmental context (Renders and Gaeremynck 2012). We do this by including Hofstede’s (1998) cultural value dimensions, which we in turn relate to compliance measures to develop a framework for understanding how the cultural norms of the home markets of these non-domestic companies might impact their approach to compliance. In particular, we hypothesise on lower levels of compliance at companies from markets with cultural values on Hofstede’s (1980a, b, 1983a, b, 1984, 1990, 1993, 1994a, b, 1997, 1998) scales

divergent from our UK baseline. In particular, we suggest that high power-distance (PDI) and uncertainty-avoidance (UAI) cultures are likely to be less compliant (Carl et al. 2004). The recent sample allows us to identify any potential challenges to the current UK governance regime from the potential for lower levels of compliance in the growing population of non-domestic companies listed on the LSE.
We define compliance referenced against the key stan- dards of the Financial Reporting Council’s September 2012 UK Corporate Governance Code (‘the Code’) on leader- ship, Board structure, effectiveness and remuneration. These standards represent the essence of the Code, setting the UK standard for the interpretation of current good practice, as defined by its governing principles and specific provisions. The Code principles, anchored in the reduction of agency costs (Jensen and Meckling 1976), are the UK standard applicable to all listed entities and provide an aspirational framework of governance for non-domestic companies whose home markets may be characterised by institutional or political weakness (Ware and Noone 2003). Two further principles on relations with shareholders and accountability form part of the Code, but are less central to our analysis of compliance, requiring further qualitative investigation. Instead, we incorporate shareholding struc- ture and analyse the effects of controlling ownership structure as a determinant of compliance. We report com- pliance in terms of full, partial or non-compliance. We acknowledge the subjectivity in cultural studies in assess- ing levels of compliance with our selected variables (Tre- isman 2000) and develop a composite compliance measure of Board structure and effectiveness to analyse the com- pliance implications.
The paper is structured as follows: In the next section, we review and develop the theory in line with our proposed structure, firstly  by incorporating Hofstede’s  cultural dimensions. We then define compliance and evaluate how culture may impact approaches to compliance related to the principles of the UK Corporate Governance approaches to compliance related to principles of the Code. In the fol- lowing sections, we then describe our methodology in gathering and analysing the data before presenting our results, together with implications for researchers and practitioners.

Theory Development

Governance, though widely researched, has not as yet produced a consensus  around  its  definition  (Kaufmann et al. 2010). It is generally accepted at a minimum to set rules, enforcement mechanisms and a monitoring regime, where   corporate   governance,   ‘the   system   by   which

companies are directed and controlled’ (Smerdon 1998,
p. 1), is focused on the equity of ‘the structure of rights and responsibilities among the parties with a stake in the firm’ (Aoki 2000, p. 11).  Much  of the corporate  governance literature focuses on links between compliance monitoring and performance (Aguilera and Cuervo-Cazurra 2009; Dedman 2003; MacNeil and Li 2006) and the definition of a measure of good governance (Arcot and Bruno 2007; Brown and Caylor 2006; Renders and Gaeremynck 2012; Thomas 2010; van Essen et al. 2013). We define compli- ance in terms of full, partial or non-adherence to key principles of the Code. Our contribution to theory devel- opment is in the theoretical link between home market culture (Hofstede 1984, 1991, 2001) and possible non- compliance with the Code principles for the growing numbers of non-domestic companies listed in the UK (Burgess 2011; Dawkins et al. 2012).

Home Market Culture

Culture is ‘the collective programming of the mind that distinguishes the members of one category of people from those of another’ (Hofstede and Bond 1988, p. 6) and is likely to influence organisational behaviour (Hofstede 1983a, 2001; Doidge et al. 2007; House et al. 2002, 2004). Nations ‘are the source of considerable amount of mental program- ming of their citizens’ (Hofstede 1991, p. 12); thus, organi- sational behaviour is likely to be reflected in differences in national cultural values and practices (Chan and Cheung 2008; Naor et al. 2010; Schein 1996). Similarly, culture underpins governance systems (Mintz 2005) and behav- ioural attitudes impact the culture of compliance and approaches to monitoring and enforcement (Licht 2001b).
‘Many aspects of organizational theories produced in one culture may be inadequate in other cultures’ (Triandis 1983, p. 139). Dominant values in the global context are a free market economy, democracy, freedom of choice, individual rights and respect for the rule of law whilst tolerating and promoting local norms (Gupta and Govind- arajan 2000). Yet amid a greater emphasis on global business, local and national cultural norms determine companies’ attitudes to structure, organisation, control and regulation based on ‘deeply embedded patterns and rules that still continue to regulate the business environment’ (Randall 2001, p. 10). Culture is static (Hofstede 1980a) and is reflected in the intractability of social institutions (Licht et al. 2003; McCarthy and Puffer 2002). Cultural distance, a construct denoting the degree of similarity or dissimilarity between cultures, has come to prominence and is likely to be associated with divergent organisational characteristics and behaviours (England 1975; Kelley and Worthley 1981; Laurent 1981; Lincoln et al. 1981; Scar-
borough 2000).

Hofstede’s (1980a) work on the role of national cultural norms impacting organisational culture has been widely used as a reference standard in cross-cultural research. The Hofstede framework has been largely validated (Sonderg- aard 1994) and the cultural values widely applied in the international business arena to demonstrate the value of understanding the relationship between culture and firm performance, structure and governance (Li and Harrison 2008). The origins of Hofstede’s study were in an audit of company morale amongst IBM employees at global loca- tions in 1968 and 1972. The data were collected and ana- lysed from 116,000 employee satisfaction surveys completed by 88,000 IBM employees in 50 countries and three multi-country regions, being West Africa, East Africa and the Arab countries. The sample was reduced to 40 countries and regions with more than 50 responses each. Country-level factor analytic results allowed a classifica- tion along four dimensions, subsequently increased to a fifth dimension (Hofstede and Bond 1988). Hofstede argued that the crucial requirement is that samples be well matched across countries, not that they be representative, and asserted that comparing IBM subsidiaries shows national culture differences with unusual clarity, because the samples are so homogeneous in terms of employer, type of work and education level.
Furthermore, a basic premise in the international busi- ness literature is that national, cultural, political as well as formal and informal institutional contexts may set the defining corporate governance framework (Globerman and Shapiro 2003; Strange et al. 2009). In this environment, the Anglo-American model of governance, based on the notion of the firm operating in the interests of shareholders (Fama and Jensen 1983a, b), is an aspirational framework for ensuring the effective monitoring of company performance despite the widely reported weak relationship between executive pay and performance (Frydman and Saks 2010; Gregg et al. 2009, 2012; Jensen and Murphy 1990; McKnight and Weir 2009). Typically, it is perceived that the separation of the roles of Chief Executive Officer (CEO) and Chairman and a single-tier Board are conducive to improved monitoring by shareholders (Dahya et al. 2006), principles which are enshrined in the Code (FRC 2012). This convergence on the Anglo-American gover- nance model (Davis and Steil 2001; Rubach and Sebora 1998; Witt 2004)  is a  result  of  the share  premium for companies applying such governance principles (Hebb and Wojcik 2005).
Non-domestic companies tended in the 1980s and 1990s to seek destination exchanges to cross-list based on com- mon language or institutional similarity (Davidson 1980; Licht 2004; Pagano et al. 2002) or cultural homogeneity (Pagano et al. 2001). Later evidence suggests a cultural divergence based on a further globalisation of the world

economy (Doidge et al. 2009b, 2012; Ellis et al. 2012; Stulz 1999). A convergence on codes of good governance based around English common law and the Anglo-Ameri- can shareholder value model (Aguilera and Jackson 2003; Shleifer and Vishny 1997) had been evidenced in 64 countries by 2008 (Aguilera and Cuervo-Cazurra 2009). The diffusion of governance codes (Cuervo-Cazurra and Aguilera 2004) and extension of the Anglo-American model are based around principles related to: (i) the bal- ance of executive and non-executive directors; (ii) sepa- ration of Chairman and CEO functions; (iii) quality of financial statements and of information provided to the Board; (iv) transparency of appointment of new directors; and (v) an internal system of control and accountability (Aguilera and Cuervo-Cazurra 2004; Van den Berghe and Levrau 2004).
Answering a call from Banalieva and Robertson (2010) for research into the relationship between foreign cross- listing and home country institutional context, norms and behaviours, we incorporate Hofstede’s (1998) framework of cultural dimensions into our analysis using the well- defined PDI, UAI, individualism versus collectivism, UAI, masculinity–femininity and long-term versus short-term orientation axes. We supplement this analysis with the country-level World Bank governance indicators (Kauf- mann et al. 2010) based on accountability, political sta- bility, governmental effectiveness, regulatory quality, rule of law and the level of corruption.
A critical reason for seeking a non-domestic listing on the LSE is likely to be its reputation for institutional quality, combined with weaknesses in the governance environment in domestic markets, particularly for those companies incorporated in  emerging markets or  with  a large share of operations in such countries (Hoskisson et al. 2013; Peng 2012; Peng and Blevins 2012; Vaaler and Zhang 2011). We hypothesise that the compliance regimes in those countries and regions that are significantly diver- gent from the UK cultural values ascribed by Hofstede will be characterised by weaker effectiveness of governance. This may reflect: (i) states with failed democratic institu- tions (Shleifer 1997); (ii) low economic development or exclusion from the global trading economy (Treisman 2000); (iii) a poorly developed regulatory environment subject to insufficient controls or ineffective enforcement (Brownbridge and Kirkpatrick 2000); and (iv) the existence of ‘well-known cultural differences around the globe with respect to standards of acceptable and unacceptable behavior’ (Ware and Noone 2003, p. 198). Although attempts at defining the likelihood of non-compliance are likely to be subjective (Treisman 2000), these assessments potentially reflect and influence behaviours in these coun- tries (Mauro 1995). Non-compliance is more likely in countries with an ineffective legal system or where the

enforcement  of  the  rule  of  law  is  weak  (Durnev  et al. 2009).
Sison’s ground-breaking (2000) work established a link between Hofstede’s cultural values and corporate gover- nance practice, building on the earlier research by Turn- bull (1997) and Gatignon and Anderson (1988) showing governance implications linked to cultural distance based on different cultural approaches to risk (Caves 1982). National differences in corporate governance mechanisms have long engaged scholars (O’Sullivan 2000;  Shleifer and Vishny 1997; Thomsen and Pedersen 2000). Chan and Cheung (2008) develop this using multiple regressions linking corporate governance practices in 43 countries with stock market data, finding significant relationships between Hofstede’s cultural values and good corporate governance practice. The relationship between the  PDI and UAI variables and governance compliance is partic- ularly strong.
Our research develops from the earlier work indicating the value of Hofstede’s cultural value dimensions for cor- porate governance (Caves 1982; Chan and Cheung 2008; Gatignon and Anderson 1998; Turnbull 1997). Globalisa- tion has reinforced the considerable differences in the quality of standards and approaches to corporate gover- nance and has reinforced the need for protection for minority shareholders. This includes an increased emphasis within the governance arena on shareholding structure (Hofstede 2004). We select the PDI–UAI dimensions in line with prior governance research using Hofstede’s cul- ture metrics (Chan and Cheung 2008), as these value dimensions are expected to offer the greatest insight into the potential for compliance issues. From the work of Hofstede (2001), it is evident that in high PDI countries there is a strong hierarchy that dominates decisions within organisations. Decision making tends to be centralised around powerful individuals, with no evident involvement of others. In such a context, compliance with regulations will be seen as coming from outside of the organisation’s power structure and thus subservient to the internal authority. Where countries have high levels of UAI, or- ganisations tend to react to perceived threats from external ambiguous contexts by developing internally driven bureaucratic processes designed to protect the interests of the organisation. When high UAI is combined with high PDI, then organisations tend to have highly developed internal bureaucracies which are power based and in which the internal power structures dominate, which appears to be culturally divergent from the principles of the Code. Thus, compliance with external demands, rules and regulations is likely to be of secondary importance.
The PDI dimension is defined as ‘the extent to which a society accepts the fact that power in institutions and organizations is distributed unequally’ (Hofstede 1980b,

p. 45) or ‘the degree of inequality among people which the population of a country considers normal’ (Hofstede 1994b, p. 5). In management terms, it is the extent to which subordinates are not expected to express disagreement with their supervisors and supervisors are not expected to con- sult with their subordinates in the decision-making process (Hofstede 1980a, 2001).
We note the tendency for high PDI on the Hofstede cultural value scale to be associated with a strong leader, with less scope for discretionary action by shareholders and groups not associated with the power axis (Daily and Johnson 1997) thus inferring implications for the  com- pany’s approach to compliance (Moore et al. 2010). Countries high in PDI are often associated with autocratic or paternalistic leaders (Carl et al. 2004) and the use of coercion (Hofstede 1980a, 1991; House et al. 2004). Such societies will have unequal distribution of power (Chan and Cheung 2008), with a tendency to corruption (Davis and Ruhe 2003), from which we hypothesise a greater pro- pensity to non-compliance. On the  other hand,  the UK cultural norm is for lower PDI, which is likely to empower and motivate employees and shareholders (Nakata and Sivakumar 1996) and improve communication (Naor et al. 2010).
Uncertainty avoidance is defined as ‘the extent to which a society feels threatened by uncertain and ambiguous situations and tries to avoid these situations by providing greater career stability, establishing more formal rules, not tolerating deviant ideas and behaviors, and believing in absolute truths and the attainment of expertise’ (Hofstede 1980b, p. 45). This dimension has been further linked to people’s preference for the flexibility of unstructured sit- uations (Hofstede 1994b). Uncertainty avoidance should not be confused with risk avoidance, as ‘it does not describe one’s willingness to take or avoid risk, but rather is associated with preferences for clear rules and guidance’ (Hofstede 2001, p. 149).
High UAI cultures tend to display well-established norms and processes, and an intolerance of vagueness (Husted 2002), which may imply a need for informal channels (Getz and Volkema 2001) in response to bureaucratic institutional contexts. In fact, Chan and Che- ung (2008) found that 42 % of the difference in various countries’ approaches to corporate governance could be explained by the PDI and UAI variables. Chan and Cheung (2008) further showed that countries with high PDI and UAI scores were associated with low factor scores in international corporate governance rankings based on 2004 data from International Institute of Management Develop- ment (IMD 2004). We, therefore, hypothesise that com- panies from countries with high scores in these two dimensions will be associated with lower levels of com- pliance.   Utilising   these   two   dimensions   concurrently

enables us to define cultural similarity to our UK bench- mark, and we subsequently consider the likely implications for compliance with the Code principles from this cultural disconnect between the home country and listing market. Empirical evidence (Hofstede 1980a, 1994b) suggests the PDI–UAI matrix is significant in how national culture impacts on organisational behaviour and is deemed critical in determining how  societies  approach  organising themselves.
We exclude analysis of the Hofstede dimensions relating to individualism-collectivism (IDV), masculinity–femi- ninity and long-term orientation (LTO) to focus on the two dimensions most closely related to our central hypothesis. IDV is defined as ‘the degree to which people in a country prefer to act as individuals rather than as members of groups’ (Hofstede 1994b, p. 6). Individualism is ‘a loosely knit social framework in which people are supposed to take care of themselves and of their immediate families only’, and collectivism ‘is characterized by a tight social frame- work in which people distinguish between ingroups and outgroups, they expect their ingroup to look after them, and in exchange for that they feel they owe absolute loyalty to it’ (Hofstede 1980b, p. 45).
The fourth dimension is masculinity–femininity (MAS), with masculinity defined as ‘the degree to which values like assertiveness, performance, success and competition, which in nearly all societies are associated with the role of men, prevail over values like the quality of life, main- taining warm relationships, service, care for the weak, and solidarity, which in nearly all societies are more associated with the role of women’ (Hofstede 1994b, p. 6). Femininity is further associated with a society based on cooperation (Hofstede 2001). If there are large differences between the role of men and women, ‘the dominant values are ‘‘mas- culine’’’ (Hofstede 1994b, p. 6). LTO refers to future-ori- ented values such as persistence and thrift, and short-term orientation refers to past- and present-oriented values such as respect for tradition and fulfilling social obligations (Hofstede and Bond 1988).
The above theory and empirical evidence linking culture to governance lead us to suggest:
Hypothesis 1 Non-domestic companies from  countries with values in the Hofstede PDI and UAI dimensions higher than the UK benchmark will have lower levels of compliance with key principles of the Code.

The Non-Domestic Context

The globalisation of financial markets (Aguilera and Cu- ervo-Cazurra 2004; Doidge et al. 2012; La Porta et al. 2008) sets the context for companies to seek a cross-listing of  their  equity.  Despite  few  barriers  to  international

investment in a globalised financial market, firms continue to seek to list their shares in non-domestic markets. Market liquidity theory determines the reason for the strategic choice (Karolyi 2012) to cross-list is: (i) to appeal to investors (Foerster and Karolyi 1998; Karolyi 1998; Rao et al. 2000); (ii) to take advantage of the regulation regime promoted by certain exchanges that are valued by investors (Licht 2000); (iii) because the home market is associated with an institutionalised environment of poor investor protection (Bergman and Nicolaievsky 2007; Durnev and Kim 2005; Hollingsworth and Boyer 1997; La Porta et al. 1998, 1999; Lins et al. 2004; Reese and Weisbach 2002; Saudagaran 1988); (iv) to lower the cost of capital by widening the shareholder base and  allowing current shareholders to dispose of their holdings in a more liquid market (Bancel and Mittoo 2009; Doidge et al. 2009b; Fanto and Karmel 1997; Hail and Leuz 2009; Karolyi 2006; Licht 2004; Lombardo and Pagano 1999; Saudagaran 1988; Stulz 1999); and (v) to reduce the information asymmetry, as non-domestic exchanges are likely to have superior knowledge of pricing of the industry’s stocks (Pagano et al. 2002). A non-domestic listing will be asso- ciated with considerable costs (Gompers et al. 2003). These costs relate to meeting the greater compliance requirements of the prestigious exchange and the increased scrutiny by the media and analysts (Baker et al. 2002; Lang et al. 2003; Stulz 1999). These costs are offset by the benefits of higher firm valuations following the adoption of stronger shareholder rights (Deutsche Bank 2004).
Corporate governance and agency theory set a second defining framework for companies to seek a cross-listing. This ‘bonding’ hypothesis suggests corporations seek to list their equity on a non-domestic exchange due to a poor corporate governance regime in their home markets and a desire to access capital in countries with more rigorous and stringently enforced governance standards (Coffee 1999, 2002; Karolyi 2012; Licht 2003; Reese and Weisbach 2002; Stulz 1999). Agency theory proposes that the moral hazard of managers may be mitigated when companies are subject to the more strictly enforced governance guidelines required by mature stock markets. This permits companies from markets with lower standards of governance to ‘borrow’ the higher standards of a mature market (Licht 2004). The benefits of ‘bonding’ to a non-domestic market with defined governance standards may be in the form of:
(i) increased firm value (Bianconi and Tan 2010; Claessens et al. 2002; Morck et al. 2000); (ii) ‘visibility’ through greater coverage by analysts and recognition by investors of being a serious player in the global market (King and Mittoo 2007; Lang et al. 2003; Merton 1987; Sarkissian and Schill 2004; Saudagaran 1988), which reduces the information asymmetry reflected in the psychological influence of cultural familiarity and geographical proximity

on investors’ stockholding decisions (Coval and Mosko- witz 1999; Huberman 2001; Kang and Stulz 1997; Portes and Rey 2000); (iii) a commitment to disclosure and pro- tection of minority shareholders (Biddle and Saudagaran 1992; Doidge 2004; Doidge et al. 2004; La Porta et al. 1998, 2002; Moore et al. 2010; Shi et al. 2012; Shleifer and Vishny 1997; Vaaler and Schrage 2006); and (iv) signalling to investors an acceptance of the formal institutions and governance of the host country (Banalieva and Robertson 2010; Cantale 1996; Certo et al. 2001; Fanto and Karmel 1997; Filatotchev and Bishop 2002; Moore et al. 2010;
North 1990; Sanders and Boivie 2004).
The most cited reason for the cross-listing of shares on a perceived prestigious exchange is to access capital (Ba- nalieva and Robertson 2010; Baker 1992; Bell et al. 2012; Bianconi and Tan 2010; Ding et al. 2010; Doidge et al. 2004, 2009a; Mittoo 1992; Fanto and Karmel 1997). However, cross-listing on the LSE does not appear to guarantee opportunities for companies to increase their capital-raising activities (Doidge et al. 2009b). Based on the information environment hypothesis (Lang et al. 2003), it is assumed that information asymmetry between markets, and a perceived premium for markets with more stringent information disclosure requirements, will encourage firms to list on non-domestic markets (Cantale 1996; Fuerst 1998; Merton 1987; Moel 1999; Saudagaran 1988).
Furthermore, an institutional theory perspective on how organisations may respond adaptively to their strategic context (Rajagopalan and Spreitzer 1997) suggests that within particular industries mimetic isomorphic forces may drive the strategic decision making that seeks to deliver competitive advantage (D’Aveni 1994). It has been argued that companies do not act homogenously and respond to the external pressures to comply with the institutional intra- industry status quo (Greenwood and Hinings 1996; Kondra and Hinings 1998). Such imitation may, in the minds of managers, legitimise their actions, reducing the uncertainty of changes in strategic context, and demonstrate a com- mitment to fashionable management techniques and orga- nisation structures (Daft 2010; Dutton and Dukerich 1991; Kogut 1988; Sharma and Vredenburg 1998). This is likely to be evidenced in concentrated industries, such as mining and exploration, where these isomorphic pressures to imi- tate the behaviour of competitors are greater (DiMaggio and Powell 1983; Granovetter 1985; Husted and Allen 2006; Meyer and Rowan 1977; Powell and DiMaggio 1991; Scott 1995). Additionally, in extractive industries, these mimetic forces are intended to address the risk profile of the industry, which is subject to volatilities, such as the price of inputs (technology and labour), commodity prices outside the control of the firm and the valuation by markets of new exploration finds (Hoffman 1997; Sharma 2000;

Snider  et al.  2003;  Suchman  1995;  Young  and  Marais 2012). Indeed, there may be a cultural clash between the informal  power  structures  of  the  emerging  home  and operating markets of such companies (Selznick 1957) and the stronger emphasis on rigorous institutional effective- ness in a developed market (DiMaggio and Powell 1983). This sociological perspective on organisational mimesis suggests the cross-listing decision by non-domestic compa- nies may also reflect herd behaviour and hence congregate in certain industries (Baker et al. 2002). The increased visibility of a cross-listed security will benefit the controlling share- holders in the form of increased market valuations of the firm (Amihud et al. 1999; Errunza and Miller 2000; Merton 1987), in spite of the additional costs associated with higher levels of disclosure and scrutiny by analysts and the financial media in the developed listing market (Baker et al. 2002; Lang et al. 2003). The counter-argument is that controlling shareholders maintain their ability to consume the private benefits of control associated with the weak investor pro- tection  in  their  home  markets  despite  the  regulatory enforcement requirements of their adopted listing market (Siegel 2005). This may be a result of the same mimetic forces, where controlling shareholders seek a listing on a market such as the LSE with its reputation for welcoming stocks from emerging market extractive industries, where the visibility gains of cross-listing are reduced by ‘hiding’ performance shortfalls in a market with a concentration of
mining and exploration stocks.
Although certain stock exchanges are viewed as pro- viding access to investors with a focus on higher risk investments with the potential for future growth (King and Mittoo 2007), the presence of controlling shareholders is likely to remove the potential liquidity gains of cross-list- ing and to be reflected in the company’s approach to dis- closure in its earnings reporting (Leuz et al. 2003; Siegel 2005). This will have implications for the firm’s market valuation and for the protection of minority shareholders (King and Segal 2009). In fact, the presence of a control- ling shareholder is likely to see any temporary gains in market valuation being eroded (King and Segal 2009). This may mean that institutional shareholders desert the com- pany in their pursuit of lower-risk investments, with a likely return of the company to private ownership in its domestic market to internalise the benefits of control (Baker et al. 2002; Foerster and Karolyi 1999). Any short- term gains in visibility may be reflected in improved employment prospects for independent executive directors through their experiences in an international market (King and Mittoo 2007), whilst non-executive Board members will be exposed to the higher disclosure requirements and standards of compliance reporting in a developed stock market.

The UK Context—The 2012 UK Corporate Governance Code

We define compliance in relation to the principles of the Code, framing our analysis into anticipated lower levels of compliance by non-domestic companies within the rec- ommendations of the Code. The UK governance environ- ment, anchored in Cain and Hopkins’ (1980, 1986, 1993) ‘gentlemanly capitalism’, is based on common law and ‘collective individualism’ (Currie 1979), centred on non- mandatory compliance with the Code principles (FRC 2012), summarised in Appendix.
The fundamental precept of the Code is to address the principal-agent conflict (MacNeil and Li 2006; Young et al. 2002). The discordance of the evolution of the Anglo approach in the Anglo-American model of governance has produced a set of voluntary rules  and regulations, now widely adopted globally. A ‘comply-or-explain’ approach, enshrined since the first code was produced by the Cadbury Committee in 1992, remains the guiding principle. The approach requires companies seeking a listing on the LSE to adhere to the Code or explain non-compliance of any unwarranted deviations from its principles in an internal system of self-governance, based on the principle of establishing Board structures unlikely to create an oppor- tunity for the breach of fiduciary duty (MacNeil and Li 2006). Prior research has shown mixed results, with some authors noting a strengthening of oversight capability (Arcot et al. 2010; Conyon and Mallin 1997; MacNeil and Li 2006; McKnight and Weir 2009; Weir and Laing 2000; Weir et al. 2002), whilst others report lower levels of compliance or significant evidence of non-compliance (Dedman 2003; Guest 2008; MacNeil and Li 2006).
The Code offers flexibility (Arcot et al. 2010; MacNeil and Li 2006), setting the principle of good governance in the UK, and applies to all companies listed on the LSE in line with the Listing Rules of the Financial Services Authority (FSA 2004). The key sections of the Code detailed below on the leadership, effectiveness, account- ability and remuneration of the Board provided us with the measures to evolve hypotheses linked both to the Code and the literature. We focus our analysis on those sections of the Code that we feel have the greatest impact in terms of governance. In addition to the Code’s recommendations of good practice, we further incorporate shareholder structure, which is not included in the letter of the Code, but is widely held within the spirit of Anglo-American governance as an indicator of a solid approach to governance compliance. Scholars have argued that the UK system works on com- panies’ behaviours being monitored by means of institu- tionalised trust through a shared social network (Uzzi 1996, 1997). This voluntary disclosure and monitoring through networks may have less relevance to newly listed non-

domestic companies, which feel less pressured to conform to accepted norms (Moore et al. 2010).

Leadership

Agency theory and the reduction of agency costs resulting from the separation of ownership and control (Berle and Means 1932; Coase 1937; Fama 1980; Fama and Jensen 1983a, b; Jensen and Meckling 1976) are a central thesis in the corporate governance literature and are fundamental to the UK compliance environment. Governance relies on internal mechanisms to control the potential for self- interested opportunism by managers (Williamson 1988). These internal controls include: (i) Board structure (Guest 2008; Hermalin and Weisbach 2003; Raheja 2005); (ii) Board monitoring through the removal of excessive man- agerial control by means of duality (Brickley et al. 1997; Donaldson and Davis 1991; Kesner and Dalton 1986; Rechner and Dalton 1991); (iii) non-executive directors, although the academic literature offers mixed findings on Board size, which may simply reflect increased firm size, complexity and growth (Boone et al. 2007); (iv) stock ownership by Board  members; and (v)  the presence of institutional shareholders (Davis and Steil 2001; Peasnell et al. 2003; Shleifer and Vishny 1997; Vafeas and The- odorou 1998; Weir et al. 2002; Young 2000). Such prin- ciples form the basis of the UK approach to governance, diminishing the level of opportunistic behaviours by managers at the expense of shareholders’ interests sug- gested by organisational economics (Licht 2001a; Wil- liamson 1995).
This leadership principle in the Code (FRC 2012) requires an effective Board with a collective duty of delivering long-term performance, with a recommendation of clearly defined responsibilities and no single Board member having excessive decision-making power. A fur- ther recommendation is the presence on the Board of a Chairman with ultimate responsibility for its leadership, reflecting the importance of the relationship with the CEO (Tricker 1994). The implication for good governance is the separation of the role of Chairman and CEO and the pre- sence on the Board of executive decision makers respon- sible to a non-executive Chairman (de Andres et al. 2005).

Effectiveness and Board Structure

The Code guidelines (FRC 2012) on effectiveness are designed to ensure balance to allow the Board to deliver effectively. The key principles relate to Board structure, including size, diversity, a combination of executive and non-executive directors and the presence of a nomination committee of majority independent non-executive direc- tors. This is allied with the extant academic research, which

confirms the critically important role of the Board in scrutinising and moderating executive management’s decision making (Fama 1980; Gilson and Kraakman 1991; Mizruchi 1983).
From the above Code principles and theories related to the cross-listing decision, we propose in relation to all cross-listed non-domestic companies:
Hypothesis 2 Non-domestic companies will demonstrate lower levels of compliance with the Code’s leadership, effectiveness and Board structure principles.

Remuneration

The Code (FRC 2012) specifies the use of remuneration to attract, retain and motivate executive management to deliver successful performance, without paying exces- sively, and to link individual executive to corporate per- formance measures. This leads us to suggest:
Hypothesis 3 Non-domestic companies will demonstrate lower levels of compliance with the Code’s remuneration principles.

Ownership Structure

Globalisation based on slicing up the value chain (Krug- man 1995) has produced growing levels of international trade in a world of greater integration and interdependency (Gundlach and Nunnenkamp 1996). This geographical dispersion of production, deregulation of global financial markets and resulting growth in trade and capital flows combined with the changing nature of ownership structures of firms (Aguilera and Cuervo-Cazurra 2004), has pro- duced the convergence on Anglo-American standards of governance detailed above. However, the lower level of enforcement of governance regulations on foreign firms listed in the USA and UK (Siegel 2005) has brought into question this convergence. Some authors report a diver- gence in compliance, with these non-domestic firms likely to retain the large Board size and concentrated ownership characteristics of their home markets (Arcot et al. 2010; Claessens et al. 2002; Davis and Marquis 2005). A con- centrated shareholding structure is usually negatively associated with firm value due to the rights to the com- pany’s cash not being shared amongst minority share- holders (Ayygari and Doidge 2010; Shleifer and Vishny 1997). Other researchers present ‘crossvergence’ as a more likely scenario, adapting the expectations of global inves- tors based around Anglo-American governance with the lesser needs of local shareholders (Peng and Pleggenkuhle- Miles 2009; Young et al. 2004, 2008).
Whilst the Code is not explicitly concerned with com- pany  control  or  shareholding  structure,  agency  theory

suggests ownership is both an important internal gover- nance mechanism and a determinant of compliance (Arcot and Bruno 2012; Arcot et al. 2010, p. 198; Cuervo 2002; Dawkins et al. 2012; GrantThornton 2011; Shi et al. 2012; Shleifer and Vishny 1997). Countries with governance practices based on common law and the sanctity of prop- erty rights are likely to be characterised by dispersed share ownership (La Porta et al. 1999). Widely held companies are likely to be more compliant due to the pressure on management from greater shareholder influence and activism by institutional investors (Bebchuk and Weisbach 2010; Brancato 1997; Cremers and Nair 2005; Davis and Thompson 1994; Gorton and Schmid 1999; Guercio and Hawkins 1999; Hadden 1994; Mallin 2010; Shleifer and Vishny 1986). Ownership structure may be deemed an implicit principle of the Code, as it relates to the potential for governance issues in the presence of a dominant shareholder. As noted earlier, independent outside directors and stock ownership by Board members are widely believed to mitigate the agency conflict between share- holders and management (Bathala and Rao 1995), but the value of such controls is diminished in closely held com- panies due to the strong links between the Board and the dominant shareholder. Hofstede (2001) himself notes the positive correlation between a high PDI score and domi- nant shareholding structures in 12 European countries. However, institutional shareholders may take a passive approach to maintaining their relationships with the man- agement of the companies in which they are heavily invested (Black and Coffee 1994), with any activism likely to be limited to individual proposals rather than being expressed as wholesale disapproval of management (Gillan and Starks 2000).
A dominant shareholder’s ability to take private benefits from the firm may be associated with disincentives to make full public disclosures or to allocate resources for the personal gain of the controlling shareholder (Arcot et al. 2010; Barclay and Holderness 1989; Benos and Weisbach 2004; De Jong and Semenov 2006; Denis and McConnell 2003; Dyck and Zingales 2004; Faccio and Lang 2002; Liu and Magnan 2011; Morck 1996; Renders and Gaeremynck 2012). Such a dominant shareholder is likely in turn to be associated with a higher concentration of power in the CEO (Adams et al. 2005), based on Finkelstein’s (1992) dual sources of power arising from position and ownership. The effect of ownership on governance variables remains rel- atively unexplored in the literature (Judge 2011), but is associated with dominant shareholders seeking Board positions and presenting companies with greater challenges in meeting the governance requirements for the indepen- dence of directors. Yet, it has been noted that dominant shareholders are common in emerging countries (Claessens et al. 2002), where there is a potential clash of interests

between minority shareholders and controlling, often family, shareholder groupings (Arcot and Bruno 2012). ‘Controlling shareholders trade off the cost of cross-listing, defined by the improved investor protection that reduces their private benefits, against the benefit of cross-listing, captured by their ability to fund growth opportunities on better terms’ (Doidge et al. 2009b, p. 255). On the other hand, a large shareholder or shareholder concentration may address agency issues through the dominant shareholders seeking profit maximisation with sufficient control over voting rights to force compliance (Shleifer and Vishny 1986).
We develop from the above theory of concentrated shareholding structures being associated with lower levels of protection for minority shareholders a final hypothesis, which links ownership structure to likely levels of compliance.
Hypothesis 4 Closely held non-domestic companies will display lower levels of compliance with the Code.

Methods

We collected data in August 2012 from public sources (Morningstar Company Intelligence, henceforth MCI) to seek evidence relating to our four hypotheses, supple- menting these where necessary with additional materials from other secondary sources, such as company press releases, annual reports or from LSE regulatory news fil- ings. We define our key measure as compliance with the Code and assess any non-compliance with the Code prin- ciples on leadership, Board effectiveness, director remu- neration and shareholder structure. We controlled for industry effects based on the FTSE sector classifications (McGahan and Porter 1997; Rajagopalan and Datta 1996; Rumelt 1991) and considered firm size in our analysis, using market capitalisation as a measure (Laing and Weir  1999). We take a cross-sectional view of the data and do not attempt to capture any changes over time; so, our sample is fixed at the date of data collection.

Sample

In order to explore these hypotheses, we studied the 350 largest corporations in the UK by market capitalisation, constituents of the FTSE 350 index. We eliminated com- panies with a domestic domicile or incorporation, pro- ducing a sample of 68 non-domestic companies. Within this group, we found 23 companies from one of seven countries conventionally viewed as a tax haven (Jersey, Guernsey, Bermuda, Cayman Islands, British Virgin Islands,  Gibraltar  and  Luxembourg).  This  latter  group

Table 1  Sample size for our analyses

Analysis	Sample size
(n = x)
FTSE 350, excluding investment trusts	300
Non-domestic companies listed on LSE	68
Non-domestic companies from tax haven	23
territories
Total non-domestic companies in our analysis for       45
H2 and H3
Non-domestic companies from high PDI–UAI	37
countries/regions in our analysis for H1
Composite compliance measure—sub-sample of	14
non-domestic companies with lowest levels of compliance on leadership and Board effectiveness principles
Non-domestic companies with a closely held	32
shareholding structure in our analysis for H4

includes companies that were previously domestic but changed their incorporation simply to take advantage of a different tax regime to reduce their tax liability in the UK. The avoidance of corporate tax burdens has been a feature of the corporate landscape for many years (Hines and Rice 1994). We excluded from our sample all 23 companies domiciled in tax havens due to the lack of Hofstede data for these territories. Many of these companies are likely to be culturally aligned to the Anglo approach to governance due to the status of their domiciles as Crown dependencies of the UK. Of the remaining 45 companies, 35 are large multi- national enterprises (MNEs) with origins outside the UK and continuing to report the majority of their business abroad, with multiple international Stock Exchange list- ings, but for historical reasons retaining the primacy of a listing on the LSE and, in many cases, UK incorporation status. We find a further ten traditional non-domestic companies, readily defined as those incorporated outside the UK but cross-listed on the LSE. This constitutes our final sample of 45 companies (Table 1).

Data Collection

We define compliance  in terms  of  full, partial or non- compliance with the Code principles, as detailed in the hypotheses in the previous section, anchored in the stan- dards of the Code.

Home Market Culture

The Code is an international benchmark for good gover- nance (Arcot et al. 2010), and the ‘comply-or-explain’ principles have been widely adopted in countries with a legal framework based on common law. We incorporated

Table 2  Hofstede’s cultural dimensions—domestic countries/regions of foreign shares on the LSE benchmarked against UK scores

and uncertainty avoidance, which appear to be culturally distant to the principles of the Code (Carl et al. 2004; Chan

Country/ dimension	PDI	PDI
diff	UAI	UAI
diff	PDI and UAI benchmarked	and Cheung 2008; Davis and Ruhe 2003; Hofstede 1980a,
1991; House et al. 2004). We found that Ireland, Sweden,	
to UK baseline	Finland, Switzerland, the USA, Hong Kong, Australia and	
UK	35	–	35	–	–	South Africa have scores that are culturally proximate to the UK benchmark in PDI and UAI, with all other coun- tries/regions being ranked high on PDI and UAI in absolute terms and relative to the UK.
Secondly, we compared the Hofstede dimensions with the World Bank Worldwide Governance Indicators (WGI).	
Ireland	28	-7	35	0	-7		
France	68	?33	86	?51	?84		
Sweden	31	-4	29	-6	-10		
Finland	33	-2	59	?24	?22		
Czech	57	?22	74	?39	?61		
Republic						WGI (World Bank 2012) incorporates more recent as well	
Switzerland	34	-1	58	?23	?22	as time series data, a larger number of data sources and	
India	77	?42	40	?5	?47	includes an emphasis on perceptions of government and	
Hong Kong	68	?33	29	-6	?27	regulatory effectiveness, the legal environment and coun-	
Indonesia	78	?43	48	?13	?56	try-level perceptions on the adequacy of political stability	
Australia	36	?1	51	?16	?17	and democracy and the absence of corruption (Kaufmann	
South	49	?14	49	?14	?28	et al. 2010). The results are broadly in line with Hofstede’s	
Africa						dimensions, showing regulatory similarity between the UK,	
Tanzania	70	?35	50	?15	?50	Ireland, Sweden, Finland, Switzerland, the USA, Australia	
Nigeria	80	?45	55	?20	?65	and, excluding the political stability/absence of violence	
Russia	93	?58	95	?60	?118	(PS) variable, South Africa. Following Chan and Cheung	
Ghana	80	?45	65	?30	?75	(2008),  we  further  incorporate  IMD  data  (IMD  2013).	
Mexico	81	?46	82	?47	?93	IMD’s  international  competiveness  index  is  based  on	
Peru	64	?29	87	?52	?81	variables such as fiscal discipline, the diversification and	
Chile	63	?28	86	?51	?79	openness of economies and standards of technology, edu-	
USA	40	?5	46	?11	?16	cation  and  infrastructure.  The  results  are  again  broadly	
UAE	80	?45	68	?33	?78	aligned with Hofstede’s cultural value benchmark, with	
East Africa	64	?29	52	?17	?46	only the United Arab Emirates replacing South Africa as	

West Africa	77	?42	54	?19	?61

culturally proximate. Thus, in the analyses in respect of

 		H1,  we  have  focused  on  the  data  from  Hofstede’s

All data are sourced from http://geert-hofstede.com/
Presenting the data in this method shows that the countries closest to the UK benchmark across the key PDI and UAI value dimensions are Ireland, Sweden, Finland, Switzerland, USA, Hong Kong, Australia and South Africa
PDI power distance, UAI uncertainty avoidance

Hofstede’s cultural dimensions for the UK and apply a cultural proximity measure, based on the PDI and UAI variables, to analyse degrees of compliance with the Code principles.
We examine the domestic environments of the foreign- listed firms on the LSE to assess potential Code compliance issues in line with Hofstede’s (1980a, 1983a, b, 1984, 1997, 1998) cultural dimensions. Table 2 details the Hof- stede cultural value scores on the PDI–UAI scales for each market for which there is a LSE listing, benchmarked against the UK baseline values. We selected the PDI and UAI dimensions in the anticipation of the greatest insight into the potential for governance issues, based on the concentrated decision making around powerful individuals

dimensions.
In order to analyse our cultural proximity construct using the Hofstede PDI and UAI dimensions related to the literature as described above, we sought to establish a composite measure of compliance to address the potential subjectivity of our measure of the levels of compliance. We created dichotomous variables by codifying cultural prox-
imity as 1 = a score lower than the UK benchmark and
2 = a score higher than the UK on both PDI and UAI scales. We find within our sample of 45 companies for analysis that 37 are from markets with scores on both the Hofstede PDI and UAI dimensions higher than the UK values. We noted above that the countries in our sample with scores lower than the UK are Ireland, Sweden, Fin- land, Switzerland, the USA, Hong Kong, Australia and South Africa, all other companies in our sample being from countries/regions with PDI and UAI higher than the UK.
This represents our sub-sample (n = 37) for analysis in
respect of H1.
Furthermore, we reviewed the available data for the full non-domestic sample (n = 45) on the following bases to cover the main principles of the Code:

Leadership, Board Effectiveness and Structure

We gathered data on the supporting principles suggested by the Code relating to Board effectiveness, including the number of executive and non-executive directors, total Board size and structure, diversity of background (age and tenure) and the presence of a nomination committee. We proxy excessive decision-making power as: (i) the presence of an executive Chairman; (ii) the non-separation of the roles of Chairman and CEO; (iii) an unbalanced Board size with excessive representation of executive directors, sug- gesting an opportunity for entrenched decision making concentrated in the hands of a single individual or a group of individuals; (iv) a Board structure divergent from the UK norm, which anticipates an executive Board composed of, at a minimum, a CEO and Chief Financial Officer (CFO); and (v) the age and tenure of the CEO. Where disclosed, we calculated the age of the CEO in decimalised years based on published data. We used a default of the first of January where MCI was unable to verify the exact birth date of the individual CEO. We followed an identical methodology to calculate the tenure of the CEO, enhancing our database with additional secondary sources to establish the date of appointment to role.
We used the secondary source MCI as our first source of reference for the data collection; MCI is an online research service offering accurate and verifiable research into all companies listed on the LSE and biographical facts on over 42,000 active and former directors (Morningstar 2013). It offers a consistent treatment of director titles and of the assessment of the value of share options. We improved on the computation of tenure in MCI and in prior governance studies (Johnston 2002; Kaplan and Minton 2012; Karlsson and Neilson 2009) by defining tenure as the date of appointment to the CEO role rather than inferring tenure from prior CEO turnover or using commencement in executive service in equivalence to CEO tenure (Fizel and Louie 1990; Shen and Cannella 2002; Weisbach 1988). Our data on the formation of nomination committees are sourced from the governance pages of company websites and from annual financial statements.
We then collected data from MCI detailing the major shareholders of each non-domestic company in our sample. We included in our analysis the ownership structure of the non-domestic listings on the LSE in spite of Doidge et al. (2009a) finding no association between ownership char- acteristics and the probability of a company having a listing on the LSE. We define companies as widely held at the 20 % shareholding level and assign three further categories of shareholder types, being companies under the control of a majority shareholder at over the 20 % threshold; family- controlled firms; and companies with a domestic or inter- national public body as majority shareholder. We further

gathered data on compliance related to shareholding at incremental thresholds from 20 % to majority ownership over 50 %.

Remuneration

We collected data on total remuneration, including base salary, bonus, pension and the value of share options, calculated to include the value of vested long-term incen- tive plans. We link the Code principle on performance- related pay to that portion of remuneration that is discre- tionary based on the individual CEO’s performance, which we define as the cash bonus element of salary and options- related remuneration. This allows us to explore whether excessive discretionary remuneration is linked by means of power and control over the Board to the likelihood of lower levels of compliance.

Ownership Structure

We found within our sample of 45 non-domestic compa- nies that 32 have closely held shareholding structures at the widely accepted 20 % of share capital. Within this group, we seek to establish variances from our results for the total non-domestic sample and from the UK norm.

Exclusions

We did not proxy for compliance with all principles within the Code, selecting instead key measures related to the governance principles of the Code. In particular, we excluded detailed analysis of the accountability principle, which is related to the assessment, reporting and control of risk, and of relations with shareholders, which is designed to encourage constructive communication with investors. We suggest a requirement for further qualitative research into these Code principles (Dulewicz and Herbert 2004).
We focus on the degree of compliance with the Code principles. Prior research (Arcot and Bruno 2007; Arcot et al. 2010) has devoted considerable effort to examining the enforcement and monitoring of non-compliance. In the event of non-compliance, we do not include in our analysis the degree of non-compliance by examining the degree of detail included in the ‘explain’ statements reported in the ‘comply-or-explain’ process. UK domestic company Wil- liam Morrison Supermarkets Plc had a long history of non- compliance with the Code provisions on Board structure and supplied either none or poor-quality explanations for its position (MacNeil and Li 2006). Only shareholder action to address non-compliance following a period of poor performance resulted in a change in behaviour at Morrison’s  (Arcot  et  al.  2010).  We  do  not,  therefore,

consider it useful to include detailed analysis of the ‘explain’ statements in this exploratory research.

Basis of Analysis

We detailed above our approach to gathering the data. Now, we describe the methodological bases for our anal- yses. We analyse compliance in line with key principles of the Code. We define compliance as the adoption of rec- ommendations to improve the quality of corporate gover- nance and increase the accountability of companies in setting and applying the norms for the role and composition of the Board, information disclosure, the remuneration of directors and in relationships with shareholders in line with the key principles of the Code (Aguilera and Cuervo-Ca- zurra 2004).
In order to analyse H1 and H2, we assess compliance with the leadership and Board effectiveness Code princi-
ples at: (i) H1 those non-domestic companies on the high PDI–UAI scale (n = 37); and (ii) the full non-domestic companies (n = 45). We do this by codifying the separa- tion of the roles of CEO and Chairman on the Board and through collecting data on the number of executive and non-executive directors and the total Board size. Board size
should be limited to allow effective coordination (Yermack 1996) and may reflect a requirement of more complex or- ganisations to have more non-executive directors (Raheja 2005). We suggest that effective Board monitoring will be reflected in its composition with a split of executive and non-executive directors. We used data on the age and tenure of the CEO as proxies for potential risk taking or management entrenchment and indicate the potential for an agency conflict (Fama 1980).
Furthermore, we construct a composite compliance measure as a dichotomous variable to analyse the degree of compliance with the various leadership and Board effec-
tiveness principles  of  the  Code.  We  codify  these  as 1 = complies with  the  requirements  of  the  Code  and 2 = does not comply and sum these across eight measures of leadership and Board effectiveness. These are related directly to the Code and include: (i) a Board composed of an executive Chairman on the Board and/or a combined
Chairman-CEO role; the presence of executive directors, being (ii) CEO and (iii) CFO; the size of the Board, being
(iv) the number of executive directors outside the normal distribution referenced against the UK baseline and (v) the total Board size, including executive and non-executive Board members, referenced to the UK baseline; (vi) the existence of a nomination committee, being responsible for making recommendations on Board appointments and on maintaining a balance of skills and experience on the Board; (vii) the tenure of the CEO, measured against the normal distribution of the total FTSE 350 population; and

(viii) the age of the CEO, measured against the normal distribution of the total FTSE 350 population. A lower score across our composite measure of compliance, there- fore, indicates a  greater degree of compliance with the Code’s principles on leadership and Board effectiveness. The small sample size of non-domestic companies essen- tially precludes the use of inferential statistics and we present indicative findings to our exploratory hypothesis H1 relating anticipated lower levels of compliance to higher scores on PDI and UAI on the Hofstede scales.
To analyse H3, we include CEO remuneration as a variable in our analysis, as excess control by a single executive director or group of shareholders may encourage excessive discretionary remuneration out of line with firm performance (Adams et al. 2005; Arcot et al. 2010). We
include in our analysis all non-domestic companies listed on the LSE as detailed above (n = 45). We include ana- lysis  of  CEO  remuneration.  This  includes  basic  salary,
bonus and the value of any share options vested in long- term  incentive  plans.  We  calculate  the  percentage  of remuneration composed of discretionary elements. This is related to the Code principle recommending remuneration that is not excessive, but sufficient to attract the appropriate individual to the role and relates pay to firm performance. Key characteristics of the non-domestic firms listed on the LSE include closely held ownership-controlled firms
(n = 32). We proxy for managerial control and the power
of the  CEO  using shareholding structure,  reflecting the likely degree of influence exerted on the company by managers, particularly as founders (Baker and Gompers 2003; Denis and Sarin 1999). The occurrence of CEO replacement and turnover, reflected in tenure, is a likely reflection of the power of controlling shareholders (Weis- bach 1988). This is likely to be reflected in shorter CEO tenures in closely held companies (Yermack 1996). In H4, we hypothesised that closely held companies, under the influence of a dominant shareholder, are more likely to demonstrate lower levels of compliance with all of the Code principles in our  analysis. Our analysis considers both the type of controlling shareholder and the potential for lower levels of compliance in companies under majority control, defined as a holding in excess of 50 % of share capital.

Findings

In this section, we present our findings in relation to our hypotheses. We present descriptive statistics and analyses in Tables 2, 3, 4 and 5 detailing the means, standard deviations, minima and maxima of the variables used in our analyses. In summary, we find evidence for partial

Table 3  Descriptive statistics—compliance by culturally distant high PDI–UAI non-domestic companies versus all non-domestic companies and UK benchmark

Variable	Description	Mean	SD	Min	Max	
Number of Exec directors	UK benchmark	3.1	1.4	1.0	9.0	
	High PDI/UAI	2.8	1.4	0.0	6.0	
	Non-domestic	2.7	1.4	1.0	5.0	
Number of non-Exec directors	UK benchmark	5.9	1.9	0.0	14.0	
	High PDI/UAI	7.0	2.7	0.0	14.0	
	Non-domestic	6.3	1.5	4.0	9.0	
Total number of directors	UK benchmark	9.0	2.4	5.0	17.0	
	High PDI/UAI	9.8	2.9	4.0	17.0	
	Non-domestic	9.0	2.5	5.0	14.0	
Age of CEO	UK benchmark	52.7	5.6	35.6	72.4	
	High PDI/UAI	46.8	6.2	36.6	77.5	
	Non-domestic	48.9	7.1	36.6	58.6	
Tenure of CEO	UK benchmark	6.5	6.1	0.0	36.6	
	High PDI/UAI	3.5	2.3	0.3	15.3	
	Non-domestic	6.7	6.1	0.0	9.2	
CEO remuneration % discretionary (bonus and options)	UK benchmark	42.8	21.6	0.0	97.8	
	High PDI/UAI	39.7	21.1	0.0	75.6	
	Non-domestic	44.0	20.1	0.0	84.8	
Core shareholder group % shareholding	UK benchmark	10.1	6.5	3.0	34.2	
	High PDI/UAI	43.9	23.2	31.0	84.3	
	Non-domestic	35.6	17.3	13.3	69.4	
Company size (market capitalisation in GBPm)	UK benchmark	5,748	13,096	184	90,745	
	High PDI/UAI	7,953	19,198	365	97,939	
	Non-domestic	1,804	2,573	371	8,902	
UK benchmark refers to FTSE 350 index. This is composed of the FTSE 350 index constituents, excluding investment trusts (300 companies). We exclude the investment trusts due to the specific characteristics of these investment vehicles, which are the listed companies for collective investments by individuals seeking to diversify their risk (Levis and Thomas 1995), with management residing with the parent fund management group. We further exclude the 45 non-domestic companies, reducing the total UK benchmark sample to 255
High PDI/UAI relates to H1 and is based on sample n = 37 non-domestic companies from countries of origin high on the Hofstede PDI and UAI scales. Non-domestic refers to our full sample n = 45 non-domestic companies, with the data cleaned to avoid duplication of the minima and maxima from the n = 37 sample of high PDI–UAI countries. These data are presented in respect of H2

compliance with the Code principles for non-domestic companies.

Home Market Culture

We find some supporting evidence for H1. We report a link to lower levels of compliance with the Code’s recom- mendations on leadership, particularly in the definition and scope of the chairmanship role and the structure of the executive Board, for companies from markets with high PDI and UAI on the Hofstede cultural value scale. The results are presented in Table 3.
We find further evidence of non-compliance with the spirit of the Code in the number of executive chairman- ships, with 32 %  of the high PDI and UAI companies maintaining an  executive role  for the Board Chairman. Similarly, in the detailed analysis of the Board structures,

we report one company in the exploration sector with no chairmanship role on the Board and another company in the same industry with no executive directors.
Further, we report a low level of discretionary remu- neration for the CEO, with a mean of 40 % of total remuneration composed of bonus and options, a likely reflection of the  lower   level  of  Anglo-American bonus culture penetration in the domestic markets of these companies from high PDI and UAI cultures. We interpret this as a lower level of compliance, related to the Code’s remuneration principle on performance-related remuneration.
The tenure of CEOs in our sample of non-domestic companies from high PDI and UAI domiciles is notably lower than the UK benchmark at 3.5 years, indicating a cultural disconnect from the UK norm and opportunities for non-compliance based on cultural distance. The lower

Table 4  Descriptive statistics—composite leadership and Board effectiveness compliance measure high PDI-UAI non-domestic companies

Sector	Market cap	Home market	PDI	UAI	Exec chair	No CEO	No CFO	Exec board size	Total board size	Nomination committee	CEO
age	CEO
tenure	Total composite score	
Banks	386	Georgia	93	95	1	1	2	2	2	1	2	1	12	
Industrial	1,076	France	68	86	2	1	1	2	2	1	1	1	11	
Industrial	822	India	77	40	2	1	2	2	2	1	1	1	12	
Industrial	365	UAE	80	68	2	1	1	2	2	1	2	1	12	
Exploration	1,140	Ukraine	93	95	2	1	2	2	2	1	2	1	12	
Exploration	4,604	Kazakhstan	93	95	2	2	2	2	1	1	1	1	11	
Exploration	1,453	Peru	64	87	1	1	2	2	2	1	1	1	11	
Exploration	775	Czech Republic	57	74	1	2	1	2	2	1	1	1	11	
Exploration	1,374	Nigeria	80	55	2	1	2	2	2	1	1	1	11	
Exploration	1,710	India	77	40	2	1	1	2	2	1	1	1	11	
Exploration	1,317	India	77	40	1	1	1	2	2	1	2	1	11	
Exploration	2,052	Tanzania	70	50	2	1	2	2	2	1	2	1	13	
Exploration	505	Russia	93	95	2	1	1	2	2	1	1	1	11	
Exploration	1,276	Russia	93	95	1	1	1	1	1	1	2	1	11	
This composite score ranges from 8 (most compliant) to 16 (least compliant). Detailed here are the 14 companies we found to be least compliant with the leadership and Board effectiveness Code principles

Table 5  Descriptive  statistics—compliance  of  non-domestic  com- panies related to remuneration

in Table 4. We find the mean compliance score of 9.6 and use standard deviations to eliminate companies within the

Variable in GBPk except % discretionary

Description   Mean   SD	Min   Max

normal  distribution  of  our  composite  compliance  index score. This leaves a sub-sample (n = 14), being outside the
normal distribution of the total scores across all leadership

CEO basic salary	Non-
domestic

806	422	154    1,619

and Board effectiveness variables. We conduct analysis

FTSE 350	604	268	100    1,295

into these 14 companies and find a prevalence of Board

	FTSE 350	983	906	150	4,900	
CEO total remuneration	Non-	1,337	2,052	224	8,620	

CEO total remuneration pre-options

including share

Non-
domestic

domestic

1,289    1,123   159    3,593

structures divergent from the UK norm, particularly com-
panies with executive chairmanships, no CEO and/or no CFO role on the Board and fewer than anticipated execu-
tive directors. 71 % of the companies in this sub-sample (n = 14) are in the mining and exploration sector and 93 %

options

FTSE 350	1,215    1,346   150    7,355

are in the extremely high range of PDI on the Hofstede

CEO remuneration % discretionary (bonus

Non-
domestic

44.0	20.1	0.0	84.8

scale (65 to 93 versus the UK benchmark of 35) and 64 % at extremely high levels of UAI (68 to 95 on the Hofstede

and options)

FTSE 350	42.8	21.6	0.0	97.8

scale; UK, p. 35). The analysis of this sub-sample acts to confirm our findings related to our remaining hypotheses, showing CEO demographic characteristics divergent from

tenure may, however, simply reflect these entities having a shorter history as a listed entity and our primary data source defines tenure from date of LSE listing.
We also  note the  potential  impact of  controlling for company size, with the high PDI–UAI non-domestic companies (n = 37) on average 27 % larger by market capitalisation than their domestic counterparts, indicating
the likely continuation of a significant non-domestic com- pany presence in the FTSE indices.
Our composite compliance measure, codifying the degree of compliance with eight leadership and Board effectiveness principles of the Code, with minimum score 8 and maximum 16, is now analysed. The results are shown

the UK norm. We find younger CEOs, suggesting a greater propensity to risk taking (Wiersema and Bantel 1992), lower levels of knowledge gained in role and life experi- ences (McKnight et al. 2000). Combined with short tenures as CEO, this indicates a potential for strategic drift (Davidson et al. 2006; Johnson 1992) or initiating inap- propriate strategic change (Chen et al. 2009; Greiner et al. 2002; Hannan and Baron 2002).

Leadership and Board Effectiveness

We report some support for H2 on a significant link between non-domestic company status and lower levels of

compliance in terms of the leadership, Board effectiveness and Board structure principles. Our findings relating to H2 are detailed in the descriptive statistics in Table 3.
In detail, we find evidence of a significant proportion of executive chairmanships in 24 % of the full non-domestic sample  (n = 45),  with  one  company  in  the  exploration
sector failing to comply with the Code requirement for a Chairman role at the head of the Board. The proportion of executive chairmanships is significantly higher in the non- domestic sample compared to the full FTSE 350 index, where we report 15 % of companies with an executive Chairman role.
Similarly, we note a lower level of compliance amongst the non-domestic sample (n = 45) in terms of executive management. 12 % have no CEO role on the Board and no
executive directors. All companies in the FTSE 350 with such an unusual Board structure are non-domestic. We show 24 % of the non-domestic companies without a Board role for the CFO versus 7 % in the FTSE 350. Such companies may, therefore, lack some of the wider organi- sational perspectives associated with functional diversity (Simons et al. 1999).
In our sample, the non-domestic companies have mean Board sizes of 9.0 members, of which 2.7 are executive directors. This is aligned both with the full FTSE 350 constituents and with Vafeas and Theodorou’s (1998) median UK Board sizes at 250 firms of eight members and Main and Johnston’s (1993) finding of 66 % of companies with Board sizes under 10 directors. 10 % of the companies in the sample had one or less executive director. On the other hand, we find 38 % of companies in our sample with a Board size in excess of 10, suggesting a likelihood of entrenched decision making. 33 % of companies load their Boards with more than nine non-executive directors. This suggests that companies take seriously the Code require- ment to demonstrate Board independence. However, we note that the greater compliance on non-executive directors may be correlated with firm size as much as a desire to comply with the Code (Boone et al. 2007).
We report the age of CEOs of 48.9 years in the non- domestic companies with tenure of 6.7 years to be broadly in line with the FTSE 350. Deviations from the expected tenure and age of CEOs are reported in non-domestic companies from emerging markets, where there is a ten- dency for longer-tenured (7.2 years) and younger CEOs (48.9 years). This indicates possible implications for compliance in terms of greater risk taking (Wright et al. 2002) by younger managers and the overconfidence (Higgs 2009; Li and Tang 2010) and hubris (Roll 1986) more prevalent in long-tenured CEOs (Hambrick and Fukutomi 1991). The lower CEO tenures may, however, reflect the flux in the exploration sector, the largest in our sample, more than a lower level of compliance.

We find 100 % compliance with the requirement for a Board nomination committee. This is aligned with other recent UK research (Arcot et al. 2010; MacNeil and Li 2006; McKnight and Weir 2009).
The industry effect proved an illuminating basis of analysis (DiMaggio and Powell 1983;  Rajagopalan and Datta 1996; Rumelt 1991; Powell and DiMaggio 1991). Mining and exploration represented the largest sector in our sample with nine companies. Noteworthy within the companies in this industry was the misalignment of Board structures to the spirit of the Code. In detail, we noted that all companies in the exploration sector have executive chairmanships and 22 % have no CEO. The average age of CEOs  in  this  sector  is  52.6 years,  and  tenure  is  only
2.2 years. We further note an average controlling share- holding of 62 % of share capital (Siegel 2005). We surmise that short CEO tenures are indicative of both industry- specific characteristics, with CEO longevity and fortunes closely tied to exploration discoveries and commodity prices, and the power of controlling shareholders, with the potential for Board dysfunction. Due to the small sample size we were unable to cross-match these results against similar UK-domiciled mining and exploration entities, and we question the usefulness of such an approach, as even UK-domiciled mining entities will likely have significant operations in countries/regions high in PDI and UAI.

Remuneration

Responding to a call from Peng and Su (2014) for research into the link between cross-listing and executive compen- sation, our data offer some support for a lower level of compliance with the remuneration principle of the Code expressed as H3. Table 5 illustrates these results. The mean level of performance-related pay, defined as bonus and options, makes up 44 % of total remuneration for the CEOs of non-domestic companies against 43 % for the full FTSE 350 sample. However, the basic salary of non-domestic CEOs is higher than their domestic counterparts, suggest- ing remuneration for the non-domestic CEOs may be linked less to performance than to other factors, such as connections to the Board. The five CEOs in the FTSE 350 with the highest levels of basic remuneration (GBP1.3 m to GBP1.6 m) are all in non-domestic companies.

Ownership Structure

We hypothesised that there would be implications for non- compliance with the Code principles on the basis of own- ership characteristics. Table 6 summarises the results, and we find some evidence in support of H4.
Ninety percent of the UK’s largest companies are widely   held   at   the   20 %   threshold of   share   capital

Table 6  Descriptive statistics—compliance of non-domestic companies by shareholder type

Variable	Description	Mean	Standard deviation	Min	Max

Number of Exec directors	Widely held	3.1	2.0	0.0	12.0	
	Majority shareholder [20 %	2.6	1.5	1.0	5.0	
	Family shareholder	2.4	1.2	1.0	6.0	
	Public body shareholder	3.2	1.6	2.0	6.0	
Number of non-Exec directors	Widely held	7.0	2.7	0.0	14.0	
	Majority shareholder [20 %	7.8	0.8	7.0	9.0	
	Family shareholder	6.3	2.6	3.0	13.0	
	Public body shareholder	7.8	4.5	0.0	13.0	
Total number of directors	Widely held	10.1	2.8	6.0	17.0	
	Majority shareholder [20 %	10.4	1.8	8.0	13.0	
	Family shareholder	8.7	2.6	6.0	17.0	
	Public body shareholder	11.0	4.9	4.0	17.0	
Age of CEO	Widely held	53.2	5.6	40.6	67.5	
	Majority shareholder [20 %	57.9	9.6	50.4	68.7	
	Family shareholder	53.1	10.4	38.5	77.5	
	Public body shareholder	46.5	8.1	36.6	55.2	
Tenure of CEO	Widely held	8.0	6.6	0.0	26.6	
	Majority shareholder [20 %	9.9	5.7	3.9	15.3	
	Family shareholder	3.0	2.9	0.3	12.0	
	Public body shareholder	3.4	1.8	1.8	5.7	
% of CEO remuneration discretionary (bonus and options)	Widely held	51.3	19.7	28.5	90.7	
	Majority shareholder [20 %	39.8	10.2	24.9	47.3	
	Family shareholder	31.7	17.3	0.0	47.8	
	Public body shareholder	54.4	21.0	36.1	77.3	
Core shareholder group % shareholding	Widely held	24.1	11.6	6.0	69.4	
	Majority shareholder [20 %	49.2	7.8	41.6	60.1	
	Family shareholder	52.8	19.1	20.9	84.3	
	Public body shareholder	47.3	20.3	18.4	73.9	
We define public body shareholders as: sovereign wealth funds; public national or international groupings or entities created specifically to hold shares in the company, which may or may not be under state control of the home country and are likely to be strongly influenced by an individual or group of owners

(Faccio and Lang 2002). In our sample, only  21 %  of firms are widely held at that level, and we further report 12 % of companies in the non-domestic sample are under the majority control of a single shareholder and 28 % under the majority control of a group of core share- holders. Fully 47 % of our non-domestic sample is controlled by a majority shareholder, family or public body, with 31 % of the sample having a family or director grouping as the majority shareholder.
In detail, we note the fewer executive directors amongst majority-controlled and family-held companies, suggesting some influence on the Board by the major shareholders and family. Family-controlled companies tend also to have Boards with fewer non-executive directors and smaller Board sizes. This possibly reflects the family influence is through share ownership rather than day-to-day manage- ment. The family firms are also the smallest by market

capitalisation, and the discretionary element of CEO remuneration is notably lower than in the rest of our sample. We show CEO tenure to be above the mean in both widely held and majority-controlled non-domestic compa- nies and significantly below the mean in corporations with a family or public body controlling shareholder. Some of the lower tenures we report are probably due to the lower average ages of current CEOs in the group of companies with a public body controlling shareholder, whilst the lower tenure of family CEOs a probable indication of recent admission to trading on the LSE and we do not record tenure prior to the initial public listing.
Furthermore, widely held companies at the 20 % threshold are more likely to have strong representation of executive and non-executive directors on their Boards. Once the 50 % threshold of ownership is passed, the ratio of non-executive to executive directors remains compliant,

but there appears scope for greater influence by the con- trolling shareholders in those Boards where we report Boards composed of as few as four directors. We note a tendency to lower discretionary remuneration within the group of companies with a controlling shareholder at the 40 % or higher threshold and with family shareholders. This appears to confirm prior research showing lower levels of CEO remuneration in companies with concen- trated ownership (Gomez-Mejia et al. 1987; O’Reilly et al.  1988; Tosi and Gomez-Mejia 1989).

Summary

We addressed the subjectivity of the partial compliance results we encountered through a detailed analysis of the leadership and Board effectiveness variables. We found
that companies high on the Hofstede PDI and UAI scales (n = 37) have a tendency to lower levels of compliance with the Code’s recommendations on leadership, with Board structures deviant from the UK norm, with a prev-
alence of executive chairmanships. This is further evi- denced in the sub-sample (n = 14) of companies with highly divergent PDI–UAI scores.
Amongst the non-domestic sample (n = 45), we repor-
ted little evidence of overt non-compliance with the Code, rather shades of partial compliance, with a propensity to lower compliance with leadership and Board effectiveness principles when compared to the UK baseline. 24 % of the non-domestic companies in our sample have an executive chairman versus 15 % in the FTSE 350. In terms of lead- ership and Board effectiveness, we note that 12 % of the sample has no CEO position, whilst  24 % of  the non- domestic companies have no executive CFO role.
Whilst the Code principles do not make specific rec- ommendations on ownership, we found this to be an area of interest for further research, with only 21 % of non- domestic companies having a widely dispersed sharehold- ing structure. This may be interpreted as non-compliance with the spirit of the Code.

Limitations and Future Research

A limitation in our analysis is the small sample size at country level of the non-domestic companies, and we present here an exploratory approach to using Hofstede’s cultural dimensions in the context of non-domestic listings on the LSE. Whilst we have attempted in our research to impose an objective analysis of compliance with the Code, such an approach must be viewed as exploratory. Research in the strategy literature has further argued that links between the value of Board human capital, expressed as Board  structure  and  independence,  and  one of  our key

variables (Board effectiveness) are inconclusive (Johnson et al. 1996; Tian et al. 2011; Zahra and Pearce 1989).
Our selection of variables was influenced by the Code and restricted  to governance in a UK context. We acknowledge that national culture described in Hofstede’s (1980a) framework is only one aspect of organisational culture. We address one limitation of the Code in its cur- rent format by including shareholder structure as a unit of analysis to better understand how approaches to compli- ance might be influenced by factors other than culture. However, firm variables, such as the maturity, size and complexity, and industry-specific variables are equally likely to impact a firm’s approach to compliance. Follow- ing Hymer (1960) and Kogut and Singh (1988), we expect the degree of companies’ compliance with governance regulations to be impacted by: cultural characteristics; the nature, extent and prescriptiveness of the Code in force in the country of listing and home country; firm variables; and industry variables.
A second limitation is that our sample includes only companies listed on the LSE Main Market and constituents of the FTSE 350 index. This excludes all Alternative Investment Market (AIM) listings, where there is consid- erable non-domestic penetration (Doidge et al. 2009b). The AIM market remains an active component of the LSE and continues to attract initial public offerings and smaller, non-domestic companies with growth opportunities seek- ing access to capital in the UK markets. AIM is associated with a lower level of regulation than is required by the Main Market, based merely on the light touch ‘appropriate corporate governance’ (LSE 2012) with none of the FRC (2012) framework requirements. Analysis of the non- domestic AIM market companies may produce signifi- cantly different results in levels of compliance. Further, we note the predominance within our sample of companies operating in the exploration sector. This creates the potential for self-selection bias (Heckman 1979), as the types of companies seeking cross-listing seem to congre- gate in certain industries, particularly exploration.
We further suggest the following directions for future research:
Firstly, we hypothesise that applying a time series approach to both the cultural values and companies’ changing views  of compliance may be useful in future governance research (World Bank 2012). This is because it is likely that the effect of Board decisions and the results of non-compliance will be visible over longer timeframes (Aguilera and Cuervo-Cazurra 2009; Weir et al. 2002) and we recommend further research using time series data to establish changes to the levels of compliance. We further suggest that a selection of the companies in our sample, particularly from the emerging markets, is young compa- nies and their approach to governance issues is similarly

likely to change over time, as both companies and their domestic stock markets mature (Dawkins et al. 2012). Further, by taking a cross-sectional approach in our ana- lysis, we do not control for compliance before introduction of the Code (Chen and Nowland 2011) or for compliance before being subject to the requirements of the Code. Company life cycle is also likely to affect the company’s approach to governance and likely compliance (Long 2007). In early years, there may be a greater desire to demonstrate compliance to gain favour in the market. Indeed, new companies formed with an intention of a non- domestic listing may be more easily able to adapt to the reporting requirements of the proposed listing exchange than companies with an institutionalised approach to gov- ernance (Davis and Marquis 2005).
A case study approach using a time series analysis of compliance with the Code principles may shed further light on the link between cultural proximity and compliance. Many South African companies sought dual listing on the LSE in the 1980s and 1990s, primarily to address the weaknesses of the illiquid domestic capital market and foreign currency exchange controls. In order to seek fresh capital and an international presence, ‘bonding’ to the LSE provided an opportunity to internationalise the investor base in a more liquid capital market context (Bhana 2000; Sarkissian and Schill 2011). These South African compa- nies quickly restructured their modus operandi and adopted the Code recommendations of their adopted market. South Africa is characterised by a business sector with close historical ties and continuing business links to the UK, with accounting standards closely mirroring those of the UK and corporate law based on English common law. Therefore, detailed analysis of the speed of adoption of the Code recommendations might further illustrate whether the determinant in compliance is cultural proximity, both national and systemic organisational, or the duration of the share listing on a prestigious international stock market, or indeed simply the desire to gain appeal with investors.
Secondly, the FTSE indices are dynamic, with a 7 % annual turnover in FTSE 350 constituents (FTSE 2012). 22 % of companies in our non-domestic sample are addi- tions to the FTSE indices within the 12 months prior to our sampling date and 25 are small capitalisation, defined as market capitalisation  of less than  GBP1bn. It is  highly probable that of our sample, many companies may not remain in the indices due to shifts in market capitalisation reflected in the FTSE Index Committee quarterly review process, with potential implications for governance as they move off the Main Market. Due to the level of flux within the largest sector in our sample (exploration) and the rel- ative youth of some of the companies, we further hypoth- esise that they are more likely to be targets in the market for corporate control (Dahlstrand 2000; Slovin and Sushka

1993) or to seek a suspension of their listing and return to private company status to internalise the benefits to the controlling shareholders (Arcot et al. 2010; Denis and McConnell 2003; Dyck and Zingales 2004; Faccio and Lang 2002).
Thirdly, future research might incorporate qualitative approaches to report the degree of explanation in cases of non-compliance to illustrate whether non-domestic firms make use of the ‘explain’ approach in any non-compliance with the Code. However, even the level of explanation provided by domestic companies is of poor quality and dubious veracity, reflecting the lack of formal authority monitoring the ‘explain’ statements (Arcot et al. 2010; MacNeil and Li 2006). We do not cover every paragraph of each section of the Code, but select key variables for analysis. This reflects the difficulty of independent verifi- cation of some aspects of the code (Pensions Investment Research Consultants 2004) and the need for a qualitative approach to the data collection on the Code principles of accountability and relations with shareholders (Dulewicz and Herbert 2004). As we did not examine the ‘explain’ reports in response to non-compliance, we do not hypoth- esise on whether the levels of partial compliance reported in our analysis represent weaknesses in the Code in its current version.
Fourthly, future research should consider the heterogeneity of firms from emerging markets. Countries from the emerging markets constitute 46 % of our sample, and we did not dif- ferentiate between different forms of industrial organisation in these countries of origin. We note, however, that state-owned enterprises or para-statals are common in emerging markets (Peng et al. 2012) and are likely to be less minded to seek a cross-listing for reasons of reputational bonding. Similarly, business conglomerate groups are another organisation type that features regularly in emerging markets and they are likely to be able to overcome local institutional weakness through business diversification (Khanna and Palepu 1997). Future research may extend our analysis of shareholding structure to develop our understanding of potential links between family and controlling shareholder groupings and the degree of non- compliance at the likely expense of minority shareholders (Doidge et al. 2009a).

Conclusion and Research Implications

We present the findings in response to our hypotheses, relating levels of compliance with key principles of the Code to the Hofstede cultural value dimensions. To analyse the approach of non-domestic companies to compliance, we utilised a sample of non-domestic companies listed on the LSE. We used key principles of the Code to understand how  non-domestic  companies  cross-listing  on  the  LSE

might differ from their domestic counterparts in likely compliance with the Code, reflecting the home country cultural context, associated norms and anticipated behav- iours in line with Hofstede’s values.

Contribution to Theory and Knowledge

As with prior research into compliance with the Code amongst domestic UK companies (Arcot et al. 2010; Conyon and Mallin 1997; Dedman 2003; Guest 2008; MacNeil and Li 2006; McKnight and Weir 2009; Weir and Laing 2000; Weir et al. 2002), we found mixed results. We present here a nuanced picture and demonstrate a mix of full compliance with certain aspects of the Code, partial compliance with many of the paragraphs of the Code, but little evidence of outright or overt non-compliance. This probably reflects the ‘comply-or-explain’ governance regime, which requires only voluntary explanation of non-compliance rather than mandated sanction. Our results may simply reflect that the governance structures in the UK could in their delivery conflict with their intended aims: Governance mechanisms may be focused on bureaucratic compliance and be misa- ligned with the target of their intended measurement and the prevention of non-compliant behaviours. ‘Modern gover- nance structures for listed companies are often conflicted in their aims; whilst attempting to formalise expectations, roles and communication channels, non-executive directors are distanced from executives and operations, diminishing their overall contribution’ (Long 2007, p. 57). The trend to ever increasing volumes of reporting indicates that companies have taken to heart disclosure without necessarily engaging in greater compliance.

Policy Implications

Our research has implications for regulators in considering the design of governance regimes and monitoring of com- pliance with these. We suggest that similar results to ours may be applicable to non-domestic companies listed in other countries with governance codes similar to the Anglo ‘comply-or-explain’ approach (Renders et al. 2010). This defines the context for future research, aligning with doubts over the efficaciousness of ‘comply-or-explain’ regimes (Andres and Theissen 2008) and providing input into the European Commission’s study into whether effective gov- ernance requires mandated regulation (European Commis- sion 2011). Whilst we find, contrary to Dawkins et al. (2012), no supporting evidence for a dilution of UK governance standards resulting from the increased presence of non- domestic companies on the LSE, we suggest possible areas of the UK governance regime where compliance is weakest. By addressing these governance mechanisms, policymakers may be able to craft corporate governance codes to further

improve disclosure reporting and monitoring, removing any distinctions between domestic and non-domestic companies. We infer that market regulators using ‘comply-or-explain’ standards will face similar issues when approached by non- domestic companies for a share listing.
For institutional investors and fund managers, the impli- cations of our research are especially significant. The results illustrate potential pitfalls associated with investment deci- sions based on the perceived safeguards of a prestigious stock exchange listing for non-domestic companies from a cultural background more tolerant of lower levels of regu- lation and compliance. The impact of failures to fully or appropriately monitor compliance was highlighted when Kazakhstan-based Eurasian Natural Resources Corporation (ENRC) became  subject to a UK Serious Fraud Office investigation following asset write-downs and the resigna- tion of Board directors (Jones and Thompson 2013). Only 20 % of the company was offered for free float on its listing on the LSE in 2007, with the founders retaining a controlling shareholding, but with market capitalisation of GBP4.6bn the company was included in the high-visibility FTSE 100 index, which would have encouraged interest from pension funds and other institutional investors and resulted in increased public visibility. The ENRC case illustrates the issues facing exchanges such as the LSE in welcoming equity listings from markets with weaker domestic governance regimes. We suggest the Hofstede cultural values for Ka- zakhstan aligned with those of Russia, which is high on both the PDI and UAI measures, and the company was included
within our sub-sample (n = 14) of companies from high PDI
and UAI markets with a high composite compliance mea- sure, indicative of a lower level of compliance with the Code’s leadership and Board effectiveness principles. The company is now likely to be taken private, with the Ka- zakhstan government seeking to minimise reputational damage to its resource-dependent business sector. Such a move might actually prove to be most beneficial for the enterprise, as the public limited liability form of corporate organisation may be unsuited to organisations such as ENRC based on their lifecycle stage and cultural background (Jensen 1993; Turnbull 1995).
The incorporation of shareholding structure into this research is particularly relevant, as it pertains to the desire by regulators to ensure the protection of minority shareholders and the active involvement of institutional shareholders in promoting long-term performance (European Commission 2011). The implications for minority shareholders in com- panies with dominant shareholders are reflected in the lower levels of compliance noted in our research. For the owners of these companies, it appears the ‘visibility’ gained by listing on a prestigious international exchange is often offset by lower market  valuations  of the stock. This may  permit owners to dispose more readily of their holdings in a liquid

stock market but seems to ignore the interests of minority shareholders. When governance failures come to light, noted above with ENRC, minority shareholders face losses from the decision by the controlling shareholder block to take the company private. Removing the company from the regula- tor’s spotlight may give it an opportunity to address its failure to adhere to the expected governance norms of a prestigious exchange, but by doing so behind closed doors, in its domestic cultural context, international investors will be marginalised. Compliance may not be directly priced in a stock, due to the potential for above-average returns in riskier equity, and so, ENRC provides a stark reminder of the dark side of risk diversification through investments in companies with an unproven track record.

Acknowledgments We  acknowledge  the  financial  contribution made by executive search and assessment company Thorburn Mc- Alister in assisting the development of this research.

Appendix: The UK Code of Corporate Governance (2012 Principles)

Leadership and Effectiveness

Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.
There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the com- pany’s business. No one individual should have unfettered powers of decision.
The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.
As part of their role as members of a unitary board, non- executive directors should constructively challenge and help develop proposals on strategy.
The board and its committees should have the appro- priate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively. All directors should receive induction on joining the board and should regularly update and refresh their skills
and knowledge.
The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
All directors should be submitted for re-election at reg- ular intervals, subject to continued satisfactory performance.

Remuneration

Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose.
A significant proportion of executive directors’ remu- neration should be structured so as to link rewards to corporate and individual performance.
There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

Accountability

The board should present a fair, balanced and understand- able assessment of the company’s position and prospects.
The board is responsible for determining the nature and extent  of  the  significant  risks  it  is  willing  to  take  in achieving its strategic objectives. The board should main- tain sound risk management and internal control systems. The  board  should  establish  formal  and  transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship
with the company’s auditors. Relations with Shareholders
There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
The board should use the AGM to communicate with investors and to encourage their participation.
Source FRC 2012. Available at http://www.frc.org.uk/ Our-Work/Publications/Corporate-Governance/UK-Corpo rate-Governance-Code-September-2012.aspx.

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