Classifying a Company’s Country Is Complicated

We have previously talked about the basic ingredients of index construction. One of the ingredients is working out what country a stock belongs to. 

What makes a stock “American”

At the basic level, a company’s domicile sounds like it should be easy – many companies have stock that trades in the same location as their headquarters and incorporation. 

For many index providers, that’s in fact the first test that they use. 

But these days, many companies operate internationally and are publicly traded in more than one country, which makes working out what country a company belongs to more difficult. 

You know a U.S. company when you see it?

Most index providers have special rules to account for less clear situations, such as: 

• Where the assets and revenues are. 
• Where shareholders or management are located. 
• If companies are filing accounting statements with the U.S. Securities and Exchange Commission as a U.S. or foreign issuer.

Then many rank or blend these factors in a way that a company can’t qualify (the same shares) for two countries at once.

There are 29 companies in the S&P 500 that you’d probably think are American

Case in point: There are 29 companies in the S&P 500 that you probably think of as “American” but that don’t have their trading, headquarters or incorporation (the principal domicile factors in S&P’s global domicile policy) in the U.S. We list them all in Table 1, along with additional columns showing how the S&P rules extend to include almost all of the other domicile factors included above (purple header). The “fine print” in the final header row has details about how the S&P rules are then applied.

Table 1: S&P 500 “foreign” companies  

Click to see enlarged image

You can also see from the table:

• The pink shade indicates that not all stocks pass all of the “American” tests, but all pass the majority of tests. 
• The light green shade shows that there are also special rules for some specific countries, where for historical company formation reasons, S&P’s rules specifically allow a company with headquarters or its incorporation in another country to more easily be considered as a U.S. company.  

Some companies also use their 10-K (a U.S. filing with the SEC) to make additional details public about where their staff, management or clients are located.

But at the end of the day, S&P also reserves the right to consider “other factors deemed relevant” by the index committee.

In short, what Table 1 really shows, though, is that in the real world, determining a company’s country is complicated!

For S&P, this might all be about to change

In September 2024, S&P announced proposed changes to their domicile policy.

Two important proposed changes are:

• Incorporation will be much more important.
• Primary listing will be eliminated.

In addition, for those “complicated” cases, there will be four more secondary factors to consider:

1. Location of company meetings 
2. Secondary listings
3. Reporting currency 
4. Company history

A simple way to think about the new rules is in Chart 1 below. 

• First is the test of principal factors (which no longer includes “primary” listing – but still requires a liquid U.S. stock).
• Failing one of those three tests would bring in the purple “secondary factors,” including the new factors in light purple. 
• If that’s not conclusive, the new rules propose incorporation be the primary determinant (grey squares). 

Chart 1: S&P global domicile policy proposed changes  

This will make it even harder for companies with an international founder

We know that incorporation is an easy and unambiguous datapoint to collect. But that doesn’t make it the best way to define an “U.S. company.” 

It often says more about where a company’s founder grew up, than where the company’s business and investor base is now. 

For companies with foreign founders, this has the potential to significantly limit their access U.S. capital markets and institutional investors in the future. For the rest of us, it might just be a headwind for U.S. capital markets, making them less attractive to list on, slowing IPOs and eventually U.S. economic growth.

Importantly, there is time to comment!  

The S&P has set up a consultation using the form here. S&P has also set a short window for adoption, with comments set to close on Oct. 31, 2024, and the rule potentially being adopted as early as Dec. 1, 2024.  

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Nicole Torskiy, Economic Research Senior Specialist, contributed to this article.