McKinsey on Finance

Perspectives on How climate change could affect corporate valuations  1

Corporate Finance Efforts to reduce climate change can profoundly affect the valuations of many
and Strategy companies, but executives so far seem largely unaware.

Number 29, Growth and stability in China: An interview with

Autumn 2008 UBS’s chief Asia economist  8
Will the country’s economic fortunes fade as growth elsewhere declines?
Jonathan Anderson doesn’t think so.

The future of corporate performance management:

A CFO panel discussion  14
Two leading CFOs agree that when global companies attempt to improve
their performance, simple, transparent metrics are more important than
theoretically pure ones.

Why cross-listing shares doesn’t create value  18

Companies from developed economies derive no benefit from second listings
in foreign equity markets. Those that still have them should reconsider.
McKinsey on Finance is a quarterly publication written by experts and practitioners in
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 1

How climate change could affect

corporate valuations
Efforts to reduce climate change can profoundly affect the valuations of
many companies, but executives so far seem largely unaware.

Marcel W. Brinkman, As global warming spawns new regulations, technological remedies, and shifts in
Nick Hoffman, and consumer behavior, its effect on the valuations of many sectors and companies is likely to
Jeremy M. Oppenheim be profound. The shocks to some industries could be severe—potentially as severe as,
for example, the effect of the introduction of wireless telephony on the telecommunications
sector during the 1990s and of shifting oil prices on the oil and gas sector during the
1970s and 1980s. Yet executives have so far paid scant attention, either because they don’t
understand the effects of climate change on their businesses or they believe them to be
too uncertain or distant to model.

1  The six sectors are aluminum, automotive,
beer, construction, consumer electronics, and
oil and gas. We tested their sensitivity to
three levers for reducing emissions (regulatory
moves, technological shocks, and shifts in
consumer demand) and analyzed the potential
impact of climate change events on the cash
flows and 2008 net present value (NPV) of an
archetype company in each sector under
different climate change scenarios and assum-
ing different climate change drivers and
levels of impact. The events that might take
place in these companies and sectors
were examined in the short term (2008–11),
the medium term (2011–16), and the
longer term (2016 onward) in the context
of their carbon intensity, geographic
footprint, and ability to pass through costs
and to redeploy capital.
To gauge, even at this early stage, the stress
that climate change will place on the cash
flows of large public companies, we assessed
the impact of a series of carbon mitiga-
tion scenarios on benchmark companies in
six sectors.1 The change in cash flows—
compared with a business-as-usual scenario,
but without explicitly considering the
responses of individual companies over
time—indicates how much pressure
efforts to reduce carbon emissions will exert
on valuations and how much volatility
a sector’s current business systems will face.
Such an analysis cannot, however, predict
the actual impact on cash flows, valuations,
or share prices.
Not surprising, we found that carbon-
abatement efforts will put dramatically
different levels of stress on the cash
flows and valuations of different industries.
The level of change for individual public
companies within a given sector could of
course substantially exceed the average,
depending on their current position and their
ability to respond to new technologies,
changes in consumer behavior, and regulation.
Varying levels of stress
We assessed company cash flows in each
industry in three scenarios: a business-as-usual
scenario, a scenario involving the greatest
degree of change executives can now imagine
2 McKinsey on Finance Autumn 2008

(the executive scenario), and a scenario that Fundamental demand shifts

many scientists believe would be required In some industries, shifts in demand will
to stave off a high likelihood of catastrophic have a broadly negative impact on company
climate change–related events (the experts’ cash flows and therefore valuations. Oil
scenario). We chose a basket of six industries and gas consumption, for example, would
to understand how the impact could vary. have to decrease by an average of around
In some industries, the mitigation of climate 0.2 percent a year from now until 2030 to
change will become a significant corporate- meet emission reduction targets associ-
investment theme, either creating fundamen- ated with success in stabilizing greenhouse
tal shifts in demand or leading to new gases. The upstream oil and gas industry
competitive dynamics and business models. would therefore experience falling demand
In others, cash flows will be less stressed as over the long term (2016 and beyond)
short-term cost pressures are passed through as the economy shifts toward cleaner sources
to customers, thus allowing profit margins of energy (including solar, wind, and
to revert to average levels in the longer run carbon capture and storage), and as
(Exhibit 1). The nature of the impact oil-consuming sectors (such as automotive
MoFdepend
will 29 2008 on whether an industry shows and power generation) increase their
Carbon valuation
underlying structural resilience or expe- emphasis on energy efficiency. Upstream
Exhibit 1fundamental
riences of 3 shifts in demand or sig- companies could experience falling pro-
Glance: Climate
nificantly change
changed will have a major
competitive effect on shareholder
dynamics. ductionvalue
and in many
sales but not all
volumes bysectors.
2015, with a
Exhibit title: Opportunity or threat?

Exhibit 1 Potential impact on industry valuation of carbon-abatement measures, given level of changes currently
anticipated by executives, %
Opportunity or threat? Short term (≤7 years)
Long term (≥8 years)
Climate change will have a major effect on
shareholder value in many, but not all, sectors. Selected Key drivers
industries
–30 –20 –10 0 10 20 30 Short term Long term

Auto –15 t Increased regulatory t Technology shifts to new drive

pressures—eg, increase trains—if to high degree, costs
in emissions standards more than covered by passing
(European Union, California) through to consumers; otherwise
–30 +10 and consumer incentives costs not passed through

Beer –15 –5 t Higher input costs t No long-term structural

t Packaging regulations changes anticipated
t Limited passing through of
costs to consumers
0

Building 0 t Limited impact t Increased growth from

materials tightened building regulations
t Increased input costs
because of carbon pricing
–15 +30

Oil and gas –10 +5 t Downstream: impact of carbon t Upstream: decrease in oil
pricing on refining demand, because of substitution
(volume effect only)
–15 –5

2  During similar periods of discontinuity in
other sectors in the past, levels of entry and exit
rose significantly. As the telecom sector moved
to wireless, for example, only 17 of the top 30
global telecom companies (by market
capitalization) in 1997 were still in the top 30
in 2007.
3  In some scenarios, 1 percent of global
penetration by 2015.
How climate change could affect corporate valuations 3
substantial impact on cash flows. If that rates of entry and exit as new technologies
happened, valuations would fall by around or regulatory restrictions emerge and
5 percent in the executive scenario and the competitive landscape changes.2 The way
by around 15 percent in the experts’ scenario. a company reacts to changing technol-
The potential impact on value is relatively ogies and business systems will determine
low because of the short-term nature of the its performance.
valuations of upstream companies—which
mostly reflect their current high-yielding In the automotive sector, novel technologies
discovered and developed reserves. These will create new competitive dynamics and
have an average lifespan of 10 to 15 years transform business systems in the next one
and will be largely depleted by the end to five years. Cash flows could be affected
of the next decade. The value of the cash both positively and negatively. In the short
flows affected could fall further if term, tighter emission standards will have
a dramatic decline in demand pushed an impact on the mix of cars sold, helping
down prices. manufacturers with lineups of smaller,
more fuel- and emission-efficient cars. Such
By contrast, other industries could enjoy con- standards will affect the margins of both
siderable gains. Companies in the building- winners and losers and thus their cash flows
materials sector—particularly those that do and valuations, which may already reflect
business in places where building efficiency some potential changes in value.
is not yet a major issue—will probably bene-
fit from rising demand for improved energy Changed fuel efficiency and emissions
efficiency and insulation products, which will standards, combined with high oil prices,
increase their cash flows. In developed will spur the introduction of new drive-
economies, more stringent building stan- train technologies, such as electric and hydro-
dards are already creating demand for gen, which could start to reach scale by
such offerings, and the same thing will hap- 2015.3 A number of competing technologies,
pen in developing markets as well. Analysts including more efficient internal-combustion
are already calculating the impact on engines and hybrids, will be introduced,
demand of existing regulations and factoring and so will vehicles powered by compressed
it into company valuations. As compared natural gas, hydrogen, or electricity. The
with the business-as-usual scenario, the valu- impact on valuations will depend both on
ation of a representative building-materials which of these proves dominant and on
company in the developed world increases by the ability of the automotive OEMs to pass
35 percent in the executive scenario and along the costs of new technologies and
by 80 percent in the experts’ one. If more parts to consumers or to capture value from
stringent regulatory measures do not other segments of the value chain.
materialize, valuations could fall by 10 to
20 percent as a result of possible short- While the actual impact on industry valu-
term cost pressures. ations is highly uncertain, it is not
unimaginable that its discounted value
Changing competitive dynamics could rise by 10 percent as compared
Efforts to offset climate change will structur- with the business-as-usual scenario if the
ally transform certain sectors—including electric or hydrogen technologies become
automotive and aluminum—which will expe- dominant, in combination with a new and
rience more volatile returns and increased cheaper way of generating power, which
 Exhibit 2 of 3
Glance: Regional regulatory differences and the access of companies in some regions to cheaper
4 power will make margins within the primary aluminum industry more volatile, creating both winners
McKinsey on Finance Autumn 2008
and losers.
Exhibit title: Winners and losers

Exhibit 2 Impact on EBITDA1 in primary aluminum industry from introduction of direct emission costs and increases in carbon pricing
Winners and losers
Hypothetical event: Direct emission costs are introduced in European Union, and cost of carbon increases to $55 (from $25)
Regional regulatory differences and the access per metric ton in 2013. Increased costs are not passed through to EU customers, as marginal prices are set outside region. Primary
producers in Asia, North Africa, Middle East, and rest of world are not yet subject to direct emission costs.2
of companies in some regions to cheaper
power will make margins within the primary
Benchmark company Winner Loser
aluminum industry more volatile, creating
both winners and losers.

28 28
24
18 19

EBITDA margin, %
7

Before After Before After Before After

Power source
Hydro/renewable Coal

Distribution of Asia, North Africa,

production facilities by Asia, North Africa, Middle East, and
geographic location, % Middle East, and rest of world Europe
rest of world
Europe
20
40
100 100
40
North America

1EBITDA = earnings before interest, taxes, depreciation, and amortization.

2Ina scenario in which aluminium prices increase to reflect additional carbon-related costs (ie, costs are fully passed
through to consumers), EBITDA margins of benchmark and losing companies will remain constant while EBITDA margin
of winning companies will rise from 28 to 40%.

4  Based on initial cash production costs of
$1,853 per metric ton.
could let OEMs raise margins by charging
higher prices. Certain types of regula-
tory interventions, however, could raise the
industry’s costs, with no concurrent price
offsets. In that case, the industry’s value could
fall by as much as 65 percent. Nonetheless,
well-positioned players with clear leadership
in technologies and products should always
be able to outperform their competitors.
In the aluminum industry, carbon reduction
efforts will affect the cash flows and
valuations of primary aluminum producers
in three ways:
•  irect effects. Although the aluminum
D
industry does not face direct emissions costs
at present, they may be introduced in
the European Union under phase III of the
EU Emissions Trading Scheme. The impact
on valuations will depend on carbon
pricing and the extent to which the industry
receives free emission allowances. With-
out any subsidies or offsets, a carbon price
of $55 per metric ton would raise pro-
duction costs by 11 percent.4
• I ndirect effects. Since energy represents
more than 30 percent of the costs of
 MoF 29 2008
Carbon valuation
Exhibit
How 3 ofchange
climate 3 could affect corporate valuations 5
Glance: Stringent standards in the consumer electronics industry would reduce energy consumption
and even reduce costs.
Exhibit title: Lower consumption, lower costs

Exhibit 3 Consumer cost savings from adoption of 1-watt standby standard1 (based on implementation in California)2
Lower consumption,
lower costs With an extremely small . . . consumer electronics companies can help consumers save
impact on profit margins . . . significant amounts of energy.
Stringent standards in the consumer
electronics industry would reduce energy
consumption and even reduce costs. US Environmental Protection Current average Annual average cost savings
Agency (EPA) estimated standby loss, per device (with 1-watt
that cost to manufacturers of watts standard),4 $
adopting 2-watt standard
would range from –$2.00 to $0.50 Digital TV 7.33 5.46
per unit.

Net costs for manufacturers Personal laser printer 6.1 5.36

are expected to decrease to 0,
even with 1-watt standard, All-in-one stereo system 5.7 4.96
thanks to innovation and
economies of scale driven by CD player 4.0 3.15
regulation.
DVD player 1.7 0.74

1Reduction of power consumption for device on standby to ≤1 watt.

2In 2006, California had 45% higher residential electricity prices ($0.15 per kWh) than US average but lower than EU.
3Based on CNET.com energy-consumption test of 53 popular digital TV models in United States in 2006.
4Assumes product in use 20% of time, except for TVs (in use 30% of time); does not account for any efficiency savings while
in use.
Source: Australian National Appliance & Equipment Energy Efficiency Committee; Consumer Electronics Association;
Energy Information Administration, US Department of Energy; IDC; Nielsen; US Environmental Protection Agency;
McKinsey analysis

primary aluminum producers, more Regional regulatory differences and the

expensive power from higher carbon pric-
ing will put significant pressure on
margins. Without any subsidies or offsets,
for example, a carbon price of $55 per
metric ton would raise production costs by
17 percent.
•  hanging demand. As cars become lighter
C Asia, the Middle East, and North Africa, on
to reduce emissions, demand for aluminum
from the automotive sector is expected to
rise. This increase, however, may be offset
by lower demand from the packaging
industry (as a result, for instance, of stricter
regulation of nonreturnable containers)
and by a shift toward the use of secondary
aluminum from increased recycling.
If carbon emissions are strictly limited,
demand for primary aluminum may
5  Earnings before interest, taxes, depreciation, fall dramatically as less-energy-intensive
and amoritization. materials replace it.
access of companies in some areas to cheaper
power will make margins in the primary-
aluminum industry more volatile, creating
both winners and losers. In the short to
medium term, efforts to reduce carbon emis-
sions will probably exacerbate the margin
differentials between players with facilities in
the one hand, and in Europe (and potentially
North America), on the other (Exhibit 2).
Take, for example, a company with only coal-
powered European production facilities. If
carbon prices increase to $55 per metric ton,
from $25, but the price of aluminum doesn’t
increase to cover them, the company’s
EBITDA5 margins would fall to 7 percent,
from 19 percent.
In the long term, however, the short- to
medium-term advantage enjoyed by alumi-
6 McKinsey on Finance Autumn 2008
num producers in lower-cost regions like
China, the Middle East, and North
Africa will probably fall: the global stan-
dardization of carbon costs will erode
margin differentials.
Structural resilience
Some sectors will experience minimal long-
term stress from carbon-abatement efforts:
they will be able to pass along any short-
term cost pressures to customers and will
not face substitution by other products
or significant shifts in demand. In such cases,
profit margins would revert to average
levels over the medium to long term. The con-
sumer electronics industry, for example,
will probably have the technology to deal
with regulation in a way that will not
harm the bottom line.
Consumer electronics represents a large and
growing portion of residential electricity
demand. Using technologies that exist today,
the industry can make its products dramati-
cally more efficient at low and diminishing
costs (Exhibit 3). We expect increased
efficiency-improvement pressures, including
limits on standby and active power
consumption, as well as efficiency-labeling
requirements. The overall impact on
the value of the industry will in our view be
limited. Some of its revenue and margin
opportunities could have a positive impact
of up to 10 percent on its discounted
cash flows in the executive scenario, or up
to 35 percent in the experts’ one. Higher
costs that could reduce the industry’s value
by 7 percent could, however, offset
these opportunities.
The value of preparation
Much uncertainty remains over the course of
regulation and the pace of change for
the other climate change–related forces, such
as technology, that will influence abate-
ment levels. The value of companies is likely
to change as these factors start to affect
their performance. The immediate impact on
cash flows (and therefore discounted
valuations) might be limited, but it will even-
tually be significant in some industries.
As nations and companies start acting more
aggressively to reduce carbon emissions,
major shifts in the valuations of sectors and
companies will start to become clearer
and more predictable. Over the next 18 to 24
months, a number of regulatory and policy
events, such as the December 2009
Copenhagen conference to replace the Kyoto
treaty, will probably reduce the uncertainty
and spark a rethinking of how carbon
reduction efforts will affect valuations across
a wide range of industries.
Several steps can help companies and their
executives as they start to position themselves
to thrive in a low-carbon economy.
Assess the impact of abatement efforts
A critical first step is reviewing a company’s
exposure to regulatory measures (such
as carbon pricing, new standards, taxes, and
subsidies), new technology, and changes
in consumer behavior. In our experience, the
strategy mind-set required for this analysis
doesn’t come naturally to most executives.
They will have to ask themselves, for
example, how specific changes would affect
a company’s competitive position if other
companies adopted new business models or
how a company can gain a competitive
edge by moving more quickly.
Strengthen regulatory capabilities
Companies should ensure that they have
a consistent strategy, informed by analysis,
to participate in regulatory-policy dis-
cussions and to engage with policy makers
effectively and coherently across business
units. The best companies will bring public
and private stakeholders together to shape
How climate change could affect corporate valuations 7

the regulatory environment—both policy companies understand and manage the

principles and specific regulations—
so that socially efficient solutions are also
economically attractive.
Build capabilities to deal with uncertainty
The type of analysis we have conducted only
scratches the surface of what is possible.
Sophisticated scenario-planning techniques
can give managers an overall view of
how the economy—and their markets, in
particular—might evolve under different
climate change outcomes. Many companies
will succeed in managing the major trans-
formations their sectors face only if they
invest in generating more sophisticated
forecasts and deeper insights into climate
change–related developments.
impact of climate change. In the hope
of developing new solutions, some com-
panies in the electric-car segment, for
instance, are creating consortia that include
power companies, suppliers of high-tech
car batteries, and local governments.
Review investor relations
Companies will need to focus on how and
when to signal the value of their climate
change bets so that investors can assess them.
Each company will have to explain its
overall level of preparedness for the future,
the way climate change–related events
could affect its specific cash flows, and what
differentiates it from its competitors in
these respects.

Adjust investment review processes
In accordance with the realities of climate
change, decisions about new corporate
investments should be geared toward carbon-
and energy-efficient technologies that will
remain competitive over investment life cycles.
As part of a portfolio of options, compa-
nies may find it necessary to make bets
(in new technologies, for example) that are
specifically related to climate change.
Develop new external links
Venture capital firms, universities, and
scientists are logical starting points in efforts
to build external networks that can help
So far, companies have had limited success
in communicating their climate change–
related activities, often because these moves
form only a small part of a larger port-
folio. In 2008, for example, the Spanish
power generator Iberdrola spun off
part of its renewables division—among
other reasons, to access greater value.
BP has looked for ways to realize the value
of its alternative-energy investments,
proposing a partial flotation. However, very
few public companies have succeeded in
explaining the more deeply hidden effects of
climate change on their cash flows and
competitive strategies. MoF

This article is based on a project that McKinsey undertook jointly with the Carbon Trust during the spring of
2008 to assess the impact of climate change on investments. In September 2008, the Carbon Trust published a long
report on that subject, titled “Climate change: A business revolution?” It is available at www.carbontrust.com.

The authors wish to thank Elizabeth Bury for her contribution to this article.

Marcel Brinkman (Marcel_Brinkman@McKinsey.com) is an associate principal in McKinsey’s London office,

where Nick Hoffman (Nick_Hoffman@McKinsey.com) and Jeremy Oppenheim (Jeremy_Oppenheim@
McKinsey.com) are partners. Copyright © 2008 McKinsey & Company. All rights reserved.
8

Growth and stability in

China: An interview with
UBS’s chief Asia economist
Will the country’s economic fortunes fade as growth elsewhere declines?
Jonathan Anderson doesn’t think so.

David Cogman and Even before the financial crisis descended on Wall Street in mid-September, the persistent
Thomas Luedi slowdown of Western economies had observers in developed markets increasingly worried
that the malaise would inevitably spread to the major emerging markets as well. After
all, most of their stock markets slumped dramatically this year—and their economies face
continuing inflationary pressures. China, in particular, is struggling with the twin chal-
lenges of declining demand from importing countries and an overheated domestic economy.
Many executives are now wondering whether their hopes over the past few years for
growth in China were not misplaced.

On the eve of the Beijing Olympic Games,
we met in Shanghai with long-time emerging-
market observer Jonathan Anderson to
discuss whether these concerns were justified.
Anderson, the author of The Five Great
Myths About China and the World and head
of Asia-Pacific Economics for UBS, sees
quite a different story emerging.
McKinsey on Finance: Some commenta-
tors worry that a slowdown in Europe and
the United States will have an overwhelm-
ingly negative effect on the Chinese economy.
How realistic are these concerns?
Jonathan Anderson: The bottom line
is that China will slow gradually as
the world around it does, by around one
percentage point next year, perhaps
slightly more.
Indeed, in the first half of this year, everything
seemed to be going weak. Exports and trade
were slowing, domestic consumption was on
the decline, the property and construction
sectors were under very sharp pressure, and
a few bubbles burst. And while employ-
ment was strong and wages actually grew at
a good clip, food became so expensive

that it started to cut into other kinds of
expenditures—meaning that spending
in areas such as telecom and discretionary
was weak.
But as we move through the second half
of the year, inflation is slowing, so the
People’s Bank of China can start to loosen
monetary policy. That means property
construction will likely rebound by the fourth
quarter, and price indicators should then
stabilize. On the urban-consumption side,
many food prices are starting to level off.
With wages still growing and employment
still high, that should mean better con-
sumption numbers over the next 12 months.
Overall, we’re on track for real GDP
growth of around 10.5 percent this year,
and just under 9 next year.
McKinsey on Finance: So China’s already
seen the worst of it?
Jonathan Anderson: Yes. The good
news for China, and most of the emerging
world, is that most of the impact of
the slowdown has already been felt, and
it wasn’t a very big hit. Most of the
fallout from the subprime banking mess hit
the financial markets—particularly the
equity markets, where there’s been a big
sell-off over the past nine months.
But if you look at the real impact on growth,
on domestic money markets, on financial
liquidity and so forth, the emerging markets
generally have sat this one out. There’s
been almost no impact in China or the rest
of Asia, because although Chinese, Taiwanese,
and Korean banks were buying some
mortgage-backed and subprime assets, they
weren’t leveraging. Owning these assets
in itself isn’t lethal, but rather the fact that
many institutions levered up 10 or 20 times
9
by borrowing short in the money market
and then faced a fire sale when the mark
to market went against them. The average
Chinese or Asian institution bought a lot
less, in a relative sense, and had no leverage
on the liability side—and they’re perfectly
happy to hold them to maturity.
So regardless of a US slowdown and what’s
happening in Europe and the rest of
the world, Chinese growth should be all
right for the next few years. China has
massive surpluses on its current account,
and it has the world’s largest stock of
reserves. It’s also just been through a big
bank cleanup, which means that regard-
less of any near-term misbehavior, balance
sheets are much better than they were
five or six years ago. Also, Chinese tax reve-
nues to GDP are rising dramatically,
and there’s a surplus on a cash basis. That
means the country can spend money
to help stabilize the economy. There’s also
a much broader consumption base, so
for the first time in three or four years, even
farmers are making money.
McKinsey on Finance: Energy prices are
at an all-time high, as are prices for raw
materials. Won’t that have an impact on
China’s economic growth?
Jonathan Anderson: Clearly, there
will be an impact if these prices continue to
skyrocket. It’s a very different situation if
coal is at $100 and oil is at $120 and food
prices are at today’s levels than if they
all triple over the next two or three years.
Eventually, high prices would start to
hurt growth.
Furthermore, this is not a China-specific
issue. Chinese demand may be driving
energy prices up, but the Chinese aren’t the
10 McKinsey on Finance Autumn 2008
only ones suffering. High global prices
affect everyone, and in fact, China is not
necessarily even the country with the
highest exposure.
Nor is it clear that we’re looking at a long-
term environment of rising commodity
prices. A lot depends on your supply outlook.
There are good arguments that oil may
actually stay around $120 and $125 a barrel.
Food prices may have jumped enormously
in the past 12 months, but they’re starting to
look “peakish.” Fertilizer prices are now
falling. Grain prices are falling. We could see
things stabilize or even fall off. There’s no
guarantee that commodities will continue to
go up.
McKinsey on Finance: And after the next
few years?
Jonathan Anderson: At the middle of
the next decade, big demographic changes
will start to kick in, bringing significant
structural changes to China’s industrial base.
Low-end light manufacturing will likely go
through wrenching structural shifts because
wages are rising aggressively for unskilled
labor and there are shortages of skilled
workers. This is one scenario the big multi-
nationals complain about very heavily.
China’s financial system will also go
through another set of wrenching changes in
the next five to seven years. They’re prob-
ably going to open up the capital account on
the external side, and banks, as a result,
will begin to see money leaving the system.
They’ll also start to see their margins
squeezed and a lot more volatility as they
get back to areas like bonds and exter-
nal capital flows. These all have the poten-
tial to destabilize.
McKinsey on Finance: Why will China
eventually have to open a capital account?
What pressures are compelling them
to do so?
Jonathan Anderson: It’s always been
a stated policy goal. There’s a broad view
that countries are better off when they
have relatively free and open capital flows,
but also that they want to take it slowly
and gradually. Moving too quickly to cap-
ital liberalization is something that can
be damaging: one of the key causes of the
Asian financial crisis at the end of the
1990s was flinging open the doors and let-
ting money rush in at too rapid a pace.
In the meantime, allowing domestic
investors to seek better returns elsewhere
helps reduce the volatility of wealth
in China. If you lock them up at home, then
they are very exposed to big boom–
bust cycles in the domestic economy.
McKinsey on Finance: As we’ve just
seen—China’s A-share markets have come
down by almost 50 percent over the
past six months. In any other economy, that
would be a major event. Why, in China,
did it almost go unnoticed?
Jonathan Anderson: This is actually the
third big collapse of the Chinese equity
market in the past 15 to 18 years, so in some
sense it is business as usual: this is a market
that goes up and down by enormous
margins. Furthermore, China can have these
massive boom–bust cycles with such
alarming regularity because the equity market
is awfully small. If you look at the actual
free float—the traded shares, with market
exposure, held by corporations and
households in China, excluding government
holdings—it started at about 3 percent
of financial wealth at the bottom of this
cycle, in 2005. At its peak, in October
2007, it was up to about 15 percent of finan-
cial wealth—and now it’s come back
 Growth and stability in China: An interview with UBS’s chief Asia economist
down to around 10. These are not big
numbers, and as a result, there are no big
wealth effects when this market goes
up and down.
McKinsey on Finance: Do you see
China’s approach to equity markets and
capital as a long-term liability?
Jonathan Anderson: It’s certainly an
environment that raises risk profiles. Twenty
years ago, China’s socialist economy
didn’t have working equity or bond markets.
Everything was done within the budget,
through interbudgetary transfers. Since then,
all of the growth, all of the liberalization,
and most of the new investment has basically
come from the banking system. Asset
holders and borrowers had really no place
else to go—and no way to get out of
the economy. So these big ups and downs
of overlending followed by a bust do
create big risks for the banking system. This
is why Chinese banks had 35 to 50 per-
Education
Earned MA and PhD candidacy in economics
in 1990 from Harvard University
Jonathan Anderson
11
cent nonperforming loans in the late 1990s
and early 2000s.
They’ve since cleaned that up, but as long as
bank finance is the primary fuel for the
economy, there will be problems. That’s why
China’s been moving to open up its equity
and bond markets. But the starting position
is still pretty low, and it’s going to be
a long time before equities and bonds con-
tribute a meaningful amount to finance
in China.
McKinsey on Finance: How did policy
makers think about the role of equity
markets in improving governance at big
flagship companies?
Jonathan Anderson: The hope in the
1990s was that all these marginal, not-so-
good state companies could be listed,
and through the magic of equity ownership
they would suddenly improve and turn
around. That turned out to be a false hope,
Career highlights
UBS Investment Bank (2003–present)
• Managing director and head of Asia-Pacific
Economics (2007–present)
• Chief economist for Asia (2003–07)
Goldman Sachs (2001–03)
• Chief
China economist
International Monetary Fund (1992–2001)
• Residentrepresentative in Russia
• Resident representative in China (1996–99)
Fast facts
Author of The Five Great Myths About China
and the World
Ranked highly among various broker polls including
Asiamoney, Institutional Investor, TheAsset,
and FinanceAsia
Speaks fluent Mandarin Chinese and Russian
12 McKinsey on Finance Autumn 2008
and for the past ten years they con-
tinued to be marginal players with medio-
cre performance.
Part of the reason is the state of the Chinese
equity market, which has always been a
heavily retail-oriented market of either large
private investors or small retail holders.
Without the big institutional mutual funds
or large institutional investors, it wasn’t
an environment where outside owners could
exert much influence on the way companies
were run. That’s changing over time,
as the mutual funds and large institutions
come in, but the investment industry is
nowhere near where the government wants
it to be, particularly in comparison with
the United States and Europe. Because of
this, in part, the strategy now for listing
larger state companies is more to push them
abroad to go to the H-share markets—
to Hong Kong and to some extent to
Singapore and the United States, where they
face a much stronger history of share-
holder activism. And of course, the interna-
tional professional-services firms come
in and clean up the balance sheets, so inves-
tors get much better visibility than they
would with a domestic listing.
‘ In terms of fundamentals for the next couple of years,
the emerging world is going to be where all the action is’
McKinsey on Finance: Yet these Hong
Kong IPOs are typically for 5 percent
or even less of a company that’s a subsidiary
of a giant state-owned parent company.
How can an IPO that small have a tangible
impact on management?
Jonathan Anderson: It won’t radically
change the way a company does business,
but when companies prepare quarterly
reports to international standards for out-
side shareholders, this automatically
ensures that investors have a clearer view
of the company’s strategy. I suspect that
until they listed abroad, many of these large
company managers did not know what
a return on asset or a return on equity was
and had never thought about what their
cost of capital was. Now they have to answer
this question five times a day. It’s like
a crash course MBA: it doesn’t necessarily
change anything immediately—but it
can’t be bad.
Perhaps more important is that such an IPO
drastically eliminates the potential for major
misbehavior. At one time, many Chinese
companies were linked by strange holding
structures, and whenever there were big
problems, managers could just shift assets
and liabilities around between balance
sheets. It was too easy to hide a lot of quasi-
fiscal acts like speculative transactions
just by moving things around. That’s
gone now.
McKinsey on Finance: You mentioned
some wrenching structural changes in
China’s future. How serious will those be?
Jonathan Anderson: The big issue
right now is rural migration. From, say,
1995 until 2003, an ever-increasing
supply of young, unmarried workers came
out of the interior and went to the man-
ufacturing areas and the coast. This fueled
the rapid expansion of China’s light
manufacturing, with wages that grew very
slowly—2, 3, 4 percent a year. The aver-
age rural migrant was making perhaps $65
to $70 a month in net cash wages.
But in the last three or four years, wages
have picked up, growing at 10 to 15 percent
a year, maybe even slightly faster, depend-
Growth and stability in China: An interview with UBS’s chief Asia economist 13

ing on whom you talk to. Today, the average
wage is $135 to $140 a month. Within
five years, at this pace, with the renminbi
moving, it’s going to be $300 a month.
Why the change? Because of demographics.
China’s running out of young, cheap, single,
rural labor. The one-child policy came
into effect about 30 years ago, so if you look
at the under-30 demographic cohort, there’s
actually a declining number of people under
30 every year. And with 100 million rural
migrants already working outside of their
home towns and villages, there’s not
a lot more to drag out.
As a result, wages are starting to rise. It’s not
the end of the Chinese manufacturing
story. But this is the rising part of the labor
supply curve—and it’s going to continue,
because the demographic pressures are going
to be there for a long time to come. Vietnam,
India, Cambodia, and Indonesia are all
already lower than China in terms of wages.
That gap is going to widen very quickly.
What that means is that China’s going to
start to price itself out of markets for things
like sporting goods and textiles. It’s not
happening quite yet—nor will it be an abrupt
change when it does. It isn’t easy to find
50 or 60 million people elsewhere who are
going to work for cheaper wages. But
we’re at the beginning of that turning point
where new investment is going elsewhere.
Eventually, China’s share in all of those mar-
kets will fall—even as its competitive
advantage further up the value chain con-
tinues to grow, such as in electronics
and technology.
The good news is the emerging world is
still growing at record rates, and even if you
take some of this gloss off the story, it’s
still a very vibrant place. We may not see
the best market performance over the
next six to nine months, but in terms of
fundamentals for the next couple of
years, the emerging world is going to be
where all the action is. MoF

David Cogman (David_Cogman@McKinsey.com) is an associate principal in McKinsey’s Shanghai office,

where Thomas Luedi (Thomas_Luedi@McKinsey.com) is a partner. Copyright © 2008 McKinsey & Company.
All rights reserved.
14

The future of corporate

performance management:
A CFO panel discussion
Two leading CFOs agree that when global companies attempt to improve
their performance, simple, transparent metrics are more important than
theoretically pure ones.

With edgy investors warily watching every report, companies are under intense pressure
to improve their performance. The challenge is all the greater for global companies,
whose performance-management efforts must stretch across industries, geographies,
and cultures.

Yet many performance-improvement efforts performance-management philosophy into

fail because of excessive complexity, a lack
of transparency into the performance of the
whole organization, or a disconnect between
performance measures and compensation
and rewards.
These are among the perspectives of a panel
of experts convened at McKinsey’s 2008
Global CFO Forum, in London. What fol-
lows is an edited and abridged version
of the discussion between panelists Alain
Dassas, the CFO of Nissan, and Michael
Mack, the CFO of Deere. Bertil Chappuis, a
partner in McKinsey’s Silicon Valley office,
moderated the discussion.
McKinsey on Finance: Michael, tell
us about Deere’s journey to instill a new
the company.
Michael Mack: We’ve long believed that
we’re known for making great products, but
when we examined our performance back
in 2000, we realized that if we were honest
with ourselves, we haven’t always been
a great investment. And we wanted to make
our business as great as our products.
So to start, we established what we called
shareholder-value-added [SVA] performance
metrics, which are very much like the more
familiar metrics of economic value added
[EVA] or economic profit. We also measured
operating return on assets, though we adjust
our targets as a function of volume—setting
them higher if we’re in a higher-volume

environment—to recognize the operating
leverage inherent in a business like ours.
Ultimately, I think it’s fair to say that we
transformed our company from an operating
perspective and certainly from a financial
perspective. For example, prior to 2001 we
were in the bottom quartile in terms of
return on invested capital, whether measured
against peers or even very broad ranges,
like the top 500 industrial companies in the
United States. In fact, after we adopted
our initiatives to improve performance man-
agement, in 2001, we not only became top
quartile; we were top decile by 2003—about
four years before the more recent strength
in the global agricultural environment. We’ve
also dramatically improved the efficiency
of our working capital—we turn our assets
now about two-and-a-half times faster
as a whole company than we did before.
McKinsey on Finance: This wasn’t your
first effort to improve performance. Why did
this effort work where others had not?
Michael Mack: I recall being personally
part of an earlier EVA project that didn’t
work, because it was too complex. If the
point of these efforts was to talk a few
people in the finance department into sup-
porting your goals, a complex program
might have been OK. But the idea is to per-
meate deep into the organization, globally,
and get people to behave differently. That
kind of effort has to be very simple
rather than theoretically pure. I think we
have accomplished that. For example, as
I mentioned, we look at operating return on
assets, rather than return on invested capital,
because we thought the former was more
intuitive to people who work in factories
than those who work in sales branches.
They know what a receivable is; they know
what inventory is. So it’s something they
15
can visualize. And there are very few
fancy financial calculations around these
metrics in terms of how we calculate
economic profit.
We also have been very transparent. You
can look in our annual report every year
since we adopted this, and we’ve shown
the calculations for the company total as well
as by division. So there was nowhere for
underperformers to hide. And in fact, when
we started to publish these numbers, we
weren’t doing very well, and part of turn-
ing things around was highlighting what
needed to be improved. That was part of a
broader effort, around communications,
that made a real difference—staying on point,
on message, and relentlessly consistent in
communicating with any audience, internal
or external, about how this works and
what we’re trying to do.
McKinsey on Finance: Did you change
the company’s compensation and rewards
in any way to support the shareholder-
value-added goals?
Michael Mack: Yes. We designed
a variable compensation scheme to reinforce
the strategy. Basically, part of the bonus
of every salaried employee in the company—
about 25,000 people—is based on this
operating-return-on-asset metric.
We could, of course, have set quite different
goals for different business or for differ-
ent regions, based perhaps on different risk
factors, different specifics of the markets.
But we opted not to do that. And while in
some ways this is not as pure theoreti-
cally, getting it 80 percent right but well
understood and well executed is far
better than having it 100 percent right
theoretically. And in retrospect, that
was the right decision.
16 McKinsey on Finance Autumn 2008
The panelists
Alain Dassas is CFO of Nissan Motor (2007–present).
Prior to joining Nissan, he spent ten years at Renault, in
several roles, including president of the Renault
Formula 1 Team and senior vice president of finance.
Alain serves on the board of directors at RCI Banque,
Renault Finance, and Renault Samsung Motors.
One of the consequences is that you can go
anywhere in the company—whether it’s
India, China, the United States, or Russia—
and even people deep in the organization
can articulate how their particular division
or unit is performing against this metric,
because whether or not they are going to get
a bonus depends on how they’re performing.
The second compensation metric that
reinforces the SVA approach is based on
economic profit; it’s a medium-term
incentive that affects about 6,000 employees.
So performance incentives are not just for
a few employees at the top; they go pretty
deep in the organization, and this is based
on growing the business as well. It’s not just
the return on assets or return on invested
capital—it’s based on raising the bar every
year and some absolute number for eco-
nomic profit. That creates an incentive to
Michael Mack, senior vice president and CFO of
Deere (2006–present), joined the company in 2001 as
vice president of marketing and administration. He
is chair of the Iowa State University Engineering College
Industrial Advisory Council and is a registered
professional engineer.
reinvest in the business, even when this
exceeds the cost of capital. And I think that
is how one can balance the short-term
requirements and work on our efficiency, as
well as the longer-term requirements to
reinvest in the business and achieve growth.
McKinsey on Finance: Alain, Nissan
formerly used a return-on-capital approach
but recently switched to free cash flow.
What’s your experience, relative to what
Mike described?
Alain Dassas: Until a few years ago,
Nissan was managed by volume, which was
not exactly the best way to get profitabil-
ity. Then it was managed by profit. Then we
switched to ROIC, which is still one of
our major metrics. But as Michael said, it’s a
bit of a complicated measure, especially
to explain to the whole company. So

1  Europe, Japan, United States,
and the rest of the world.
The future of corporate performance management: A CFO panel discussion
we decided to switch to the more familiar
concept of cash. Everybody inside the
company understands what cash is—and
it’s fairly straightforward from under-
standing cash to understanding cash flow
and free cash flow.
The idea is to find a metric that can be the
basis for evaluating the financial perfor-
mance of our company, and free cash flow is
a very comprehensive measure of all the
activity of the company—P&L, balance sheet,
and every item on the total balance sheet.
It’s also useful to improve visibility into the
short-term performance of the company.
Our finance function probably has not been
as visible as those in some Western com-
panies. Using cash flow is one way to make
everyone aware of the importance of certain
financial ratios, both internally and externally,
for investors and financial analysts.
McKinsey on Finance: How is that
implemented on a global scale?
Alain Dassas: We started, only a few
months ago, to have the company focus on
free cash flow, and we’ve tried to have
common principles to evaluate cash flow
and free cash flow. We know what our
Bertil Chappuis (Bertil_Chappuis@McKinsey.com) is a partner in McKinsey’s Silicon Valley office. Copyright ©
2008 McKinsey & Company. All rights reserved.
17
free cash flow, compared with revenue, was
in 2007, and the goal from 2008 to 2012
is to reach 5 percent of revenue. The way we
do this is very pragmatic. It covers all
activities of the company in our four regions,1
and we’re trying to focus the responsibility
on every factor that can generate cash or use
cash. We want to avoid being overstretched,
but we want to be sure that we cover as
much as possible—and that includes a lot of
items that are outside the working capital
and capital expenditures.
It’s not yet a measure for evaluating man-
agement performance, but it will be
next year. And as Michael said, we want to
involve not only the top 10 to 20 execu-
tives but rather 1,500—which is a large part
of the company’s management—and
to include a free-cash-flow component in
their evaluation. MoF
 18
Richard Dobbs and
Marc H. Goedhart
1  Since March 2007, foreign companies have
been allowed to deregister with the US
Securities and Exchange Commission if less
than 5 percent of global trading in their
shares takes place on US stock exchanges.
2  For example, see Craig Doidge, Andrew
Karolyi, and René M. Stulz, “Why are foreign
firms that list in the U.S. worth more?”
Journal of Financial Economics, 2004,
Volume 71, Number 2, pp. 205–38.
Why cross-listing shares doesn’t
create value
Companies from developed economies derive no benefit from second listings
in foreign equity markets. Those that still have them should reconsider.
Conventional wisdom has long held that companies cross-listing their shares on
exchanges in London, Tokyo, and the United States buy access to more investors, greater
liquidity, a higher share price, and a lower cost of capital. In the 1980s and 1990s,
hundreds of companies from around the world duly cross-listed their shares.
Yet this strategy no longer appears to make Boeing and BP, have recently withdrawn
sense—perhaps because capital markets their listings.
have become more liquid and integrated
and investors more global, or perhaps Whatever benefits companies might once
because the benefits of cross-listing were have derived from cross-listing, our analysis
overstated from the start. From May shows that in general it brings few gains
2007 to May 2008, 35 large European com- but significant costs, at least for most com-
panies, including household names such panies in the developed markets of
as Ahold, Air France, Bayer, British Airways, Australia, Europe, and Japan.
Danone, and Fiat, terminated their cross-
listings on stock exchanges in New York as Limited benefits—or none
the requirements for deregistering from Previous research2 attributes several
1
US markets became less stringent. These categories of benefits to cross-listing. We
moves represent the acceleration of an investigated each of them to see if it
existing trend: over the past five years, the still applies now that capital markets have
number of cross-listings by companies become more global.
based in the developed world has been
steadily declining in key capital markets Improved liquidity
both in New York and London (Exhibit 1). Although liquidity is difficult to measure,
On the Tokyo Stock Exchange, too, the trading volumes of the cross-listed shares
some well-known companies, such as (American Depositary Receipts, or ADRs)
 MoF 2008
Cross-listings
Exhibit 1 of 4 19
Glance: The number of cross-listings from companies based in developed markets is decreasing.
Exhibit title: Different directions

Exhibit 1 Foreign listings on NYSE

Different directions Sarbanes–Oxley
550
The number of cross-listings from companies 500
based in developed markets is decreasing. 450

Number of foreign listings

400
350
Developed markets1
300
250
200
150
100 Emerging markets
50
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foreign listings on the London International Main Market (IMM)

800
700
Number of foreign listings

600
500
400
Developed markets1
300
200
100 Emerging markets

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1Developed markets: Australia, Canada, Japan, New Zealand, United States, Western Europe.
Source: Datastream; www.londonstockexchange.com; www.nyse.com (2000–07)

of European companies in the United States listed companies receive more coverage from
typically account for less than 3 percent analysts, but the reason, in part, is that
of these companies’ total trading volumes. cross-listed companies are on average larger.
For Australian and Japanese compa- After correcting for the impact of size, we
nies, the percentage is even lower. We did found that cross-listed European companies
not analyze the trading pattern for UK are covered by only about 2 more analysts
or Japanese secondary listings, but the US than those that are not cross-listed—a very
finding hardly suggests that they do modest difference, since the average
much to improve liquidity. number of analysts covering the 300 largest
European companies is 20 (Exhibit 2).
More analyst coverage Such a small increase is unlikely to have any
Academic research indicates that compa- economic significance.
nies get better or more analyst coverage when
they cross-list in the United States—and Broader shareholder base
that potential investors therefore get better In an age when electronic trading provides
information. It is indeed true that cross- easy access to foreign markets, the argument
20 McKinsey on Finance Autumn 2008

that foreign listings can give companies
a broader shareholder base no longer
holds. Furthermore, a foreign listing is not
even a condition, let alone a guarantee,
for attracting foreign shareholders. It may
improve access to private investors, but
as capital markets become increasingly global,
institutional investors typically invest in
stocks they find attractive, no matter where
those stocks are listed. One large US inves-
tor—CalPERS—has an international equity
portfolio of around 2,400 companies, for
example, but less than 10 percent of them
have a US cross-listing. In fact, because
of better trading liquidity in the home mar-
ket, institutional investors often prefer
to buy a stock there rather than the cross-
listed security.
the world. Those higher standards lent
credence to the argument that companies
applying for cross-listings in the United
Kingdom or the United States would inevita-
bly disclose more and better information,
give shareholders greater influence, and pro-
tect minority shareholders more fully—
thereby improving these companies’ ability
to create value for shareholders. However,
other developed economies, such as the
continental member states of the European
Union, have radically improved their
own corporate-governance requirements.
As a result, the governance advantages
once derived from a second listing in the
United Kingdom or the United States
hardly exist today for companies based in
developed countries.

MoF 2008
Better corporate governance Access to capital
Cross-listings
UK and US capital markets may once have When companies can’t easily attract large
Exhibit
had 2 of 4corporate-governance standards
higher amounts of new equity in their home
than theirthe
Glance: In FTSEurofirst 300
counterparts Index, parts
in other US cross-listed
of companies
markets,get only slightly
it makes sense to issue new equity
higher coverage by analysts.
Exhibit title: Comparable coverage

Exhibit 2 FTSEurofirst 300 Index, Dec 2005 Cross-listed companies Noncross-listed companies

Comparable coverage Regression line, cross- Regression line, non-

listed companies cross-listed companies

In the FTSEurofirst 300 Index, US cross- 50

listed companies get only slightly higher
coverage by analysts. 45

40
Coverage, number of analysts

35

30

25

20

15

10

0
1.0 3.0 10.0 30.0 100.0 300.0
Company market capitalization, € billion
 Why cross-listing shares doesn’t create value 21

in foreign ones through a cross-listing. As cross-listing their shares in the United

3  This figure is based on 420 depositary
receipt issues on the NYSE , NASDAQ , and
AMEX from January 1970 to May 2008
(adrbny.com).
4  Pasi Tolmunen and Sami Torstila, “Cross-
listings and M&A activity: Transatlantic
evidence,” Financial Management, 2005,
Volume 34, Number 1, pp. 123–42.
investors increasingly come to trade around
the world, however, local stock markets
have provided a sufficient supply of equity
capital to companies in the developed
economies of the European Union and Japan. planning US share transactions.
A UK or US cross-listing therefore does
not appear to confer a compelling benefit.
Besides, three-quarters of the US cross-
listings of companies from the developed
economies (through ADRs) have actually
never involved the raising of any capital in
MoF 2008 States.3 What they did was to
the United
Cross-listings
provide foreign companies with acquisition
Exhibit
currency 3 of
for4 US share transactions. As
Glance: On average, companies don’t
academic research has shown, companiessuffer negative share price movements
of a delisting.
Exhibit title: Investors don’t care
States doubled, on average, their US acquisi-
tion activity over the first five years after
the cross-listing.4 There may thus be a real
benefit from US cross-listings for companies
Significant costs—and few gains—
for valuations
Maintaining an additional listing generates
extra service costs—for example, fees for
the stock exchanges—and additional report-
ing requirements, such as 20-F statements
for ADRs. Although these service costs tend
to be minor compared with the cost of
compliance after thewith
(particularly announcement
US regulations

Exhibit 3 Average cumulative returns to shareholders before/after delistings1 announced from Dec 31, 2002, to Dec 31, 2007, %
Investors don’t care Total returns to shareholders (TRS) Involuntary delistings2
Excess TRS relative to MSCI World Index
On average, companies don’t suffer negative 5
share price movements after the announcement 4
of a delisting. 3
2
1
Delistings 0
5 –1
4 –2
–25 –20 –15 –10 –5 0 5 10 15 20 25
3
Days before/after announcement
2
(announcement date = 0)
1
0 Voluntary delistings
–1
5
–2
–25 –20 –15 –10 –5 0 5 10 15 20 25 4
3
Days before/after announcement 2
(announcement date = 0)
1
0
–1
–2
–25 –20 –15 –10 –5 0 5 10 15 20 25
Days before/after announcement
(announcement date = 0)

1Sample:229 delistings by foreign companies in developed markets from London International Main Market,
NASDAQ, or NYSE, of which 161 were voluntary and 68 involuntary.
2For example, delistings occurring as result of bankruptcy, mergers, or takeovers.

Source: Bloomberg; Datastream; London Stock Exchange; NYSE; Reuters

 MoF 2008
Cross-listings
Exhibit 4 of 4
22 McKinsey on Finance Autumn 2008
Glance: Companies from developed markets do not appear to benefit from US
cross-listing.1
Exhibit title: No impact on valuation

Exhibit 4 Developed-market companies

No impact on valuation US-listed companies Non-US-listed companies

4.5 30
Companies from developed markets do not
appear to benefit from US cross-listing.1 4.0
25
3.5
3.0 20

EV/EBITDA2
Tobin’s Q1
2.5
15
2.0
1.5 10
1.0
5
0.5
0.0 0
0 20 40 60 80 0 20 40 60 80
ROIC, exclusive of goodwill,3 % ROIC, exclusive of goodwill,3 %

1Tobin’s Q is defined as the market value of a company divided by the book value of its assets: (total assets – book value of
equity + market value of equity) ÷ total assets at 2006 year-end.
2EV (enterprise value) at 2006 year-end divided by 2006 EBITDA (earnings before interest, taxes, depreciation, and
amortization).
3Average ROIC (return on invested capital) from 2004 to 2006.

Source: Bloomberg; Datastream; NASDAQ; NYSE; McKinsey analysis

5  Involuntary delistings occur, for example, as a
result of bankruptcies, mergers, and takeovers.
6  Using multiple regression, we estimated to
what extent a cross-listing influenced
a company’s valuation level as measured by
the ratio between enterprise value and
invested capital (Tobin’s Q) and the ratio
between enterprise value and earnings before
interest, taxes, depreciation, and amortization
(EBITDA). Of course, we took into account the
company’s return on invested capital (ROIC),
consensus growth projections, industry sector,
and geographic region.
7  This finding might be explained by the much
smaller size of the sample of companies
from the emerging world and the much higher
average volatility of their equity returns.
such as Sarbanes–Oxley), they have grown
enormously over the last few years.
British Airways and Air France, which both
recently announced their delisting from
US exchanges, estimate that they will save
around $20 million each in annual ser-
vice and compliance costs. This sum prob-
ably doesn’t include the time executives
spend monitoring compliance and disclosure
for the US market.
As for the creation of value, we haven’t
found that cross-listings promote it in any
material way. Our analysis of stock mar-
ket reactions to 229 delistings since 2002 on
UK and US stock exchanges (Exhibit 3)
found no negative share price response from
the announcement of a voluntary delisting.5
Our comparative analysis of the 2006
valuation levels of some 200 cross-listed
companies, on the one hand, and more
than 1,500 comparable companies without
foreign listings, on the other, confirmed
that the key drivers of valuation are growth
and return on invested capital (ROIC),
together with sector and region. A cross-
listing has no impact (Exhibit 4).6
The skinny on emerging markets
We are still analyzing the benefits and costs
of dual listings for companies in emerg-
ing markets, where the advantages and
disadvantages vary more from country to
country than they do in the developed
world. Our analysis so far has uncovered no
clear evidence of material value creation
for the shareholders of these companies. We
found neither anything to suggest that
cross-listing has a significant impact on
their valuations nor any systematically
positive share price reaction to their cross-
listing announcements.7
Nonetheless, we did uncover some findings
specific to companies from the emerging
world. Cross-listed shares represent as much

8  See Roberto Newell and Gregory Wilson, “A
premium for good governance,” The McKinsey
Quarterly, 2002 Number 3, pp. 20–3.
Why cross-listing shares doesn’t create value 23
as a third of their total trading volume, Companies from developed economies with
for example. Furthermore, some of these well-functioning, globalized capital mar-
companies have succeeded in issuing kets have little to gain from cross-listings and
large amounts of new equity through cross- should reconsider them. Companies from
listings in UK or US equity markets— emerging markets may derive some benefit,
something that might have been impossible but the evidence isn’t conclusive. MoF
at home. Last but not least, compliance
with the more stringent UK or US corporate-
governance requirements and stock mar-
ket regulations rather than local ones could
generate real benefits for shareholders.8
The authors wish to thank Martijn Olthof and Stefan Roos for their contributions to the research
underlying this article, as well as Professor Tim Jenkinson, of Oxford University’s Saïd Business School, for
his advice on methodology.
Richard Dobbs (Richard_Dobbs@McKinsey.com) is a partner in McKinsey’s Seoul office, and Marc
Goedhart (Marc_Goedhart@McKinsey.com) is a consultant in the Amsterdam office. Copyright © 2008
McKinsey & Company. All rights reserved.
24
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