Role of stock exchanges

Role of stock exchanges

Stock exchanges have played a central role in the development of national corporate governance codes, and in their contribution to the Organisation for Economic Cooperation and Development (OECD) governance principles.

1. All companies that are listed on a stock exchange are bound by the listing rules of the exchange. These listing rules often contain corporate governance arrangements that are not covered elsewhere by company.

• In a rules-based jurisdiction, the law underpins corporate governance and reduces the need for stock market listing rules.
• Whereas, in a principles-based regime, these listing rules may be the only regulatory framework influencing the governance of companies.

In the UK, for example, it is a stock exchange requirement that listed companies comply with the UK Corporate Governance Code. This is not a legal requirement but a stock exchange requirement.

2. Other listing rules of a stock exchange concern reporting behaviour, and hence can go a long way towards promoting the high standards of transparency and openness that are expected in the disclosures and communication of a well governed company.

3. Monitoring of ongoing disclosure requirements is not the sole responsibility of exchanges, given that at least some aspects of disclosure requirements are based on legislation or regulatory authority rules. However, the thrust of exchanges' responsibility lies in their capacity to monitor market developments and bring cases, such as fraud and other abusive practices, to the attention of securities regulators.

4. Furthermore the markets play an important part in ensuring that the share price of a company truly reflects its current position, particularly in relation to good governance. The term “governance dividend” refers to the market’s ability to fairly reflect any poor governance with a depressed share price.