The FCA’s Big Listings Gamble
Investors and industry experts are divided on diminishing shareholder voting rights, as the regulator looks to shake up competition.
It’s been a tricky time for the UK economy over the last few years, to say the least.
This can be put down to a selection of topics that make for uncomfortable dinner party conversation: Brexit, austerity, political polarisation, Covid… Regardless of the primary root cause, the fact remains there has been a noticeable shift in market conditions – highlighted by a nosedive in initial public offerings (IPO) on the London Stock Exchange (LSE). According to the UK Listings Review, the number of listed companies in the country has plummeted by a whopping 40% since 2008.
A similar story is playing out on the global stage. Research by EY shows there were 551 listings that raised US$52.2 billion in capital globally in the first half of this year – representing a 12% decrease in the number of IPOs and a 16% fall in proceeds year-on-year.
“But the UK has not only had a diminished number of IPOs – it’s actually gone down the league table,” Dr Roger Barker, Director of Policy and Governance at the Institute of Directors (IoD), tells ESG Investor. This year, London fell to the bottom of the top 20 ranking for global IPO destinations – and is now joint with Kazakhstan.
Companies have shunned the London market in favour of other jurisdictions – most notably the US. This is despite efforts over the last few years to woo high-profile companies, like state-owned oil and gas major Saudi Aramco. The market has logged some notable exits, too, including Paddy Power’s owner Flutter, which shifted its main stock market listing to New York in May.
Motivated to reinvigorate the market, the UK government gambled on updating the country’s listings regime, launching a review chaired by Lord Hill in 2020. The Financial Conduct Authority (FCA) has posited that the reform would make the country more competitive, but UK-based investors are now concerned it will come at a price: namely, a lowering of corporate governance standards.
The FCA’s changes – finalised last week and due to take effect on 29 July – include merging the ‘premium’ and ‘standard’ listing segments into a single category for commercial companies, scrapping shareholder votes for significant and related party transactions, and alleviating sunset clauses on dual-class share structures (DCSS) (the latter of which ESG Investor has previously covered in-depth).
While the FCA has conceded that the new rules mean allowing greater risk, it also argues they better reflect the risk appetite the UK economy needs to achieve growth.
Investors, for their part, have countered this by saying the proposed overhaul only addresses some of the symptoms of a floundering market – not the underlying disease.
“Let’s not underestimate the magnitude of these reforms,” Barker argues. “There haven’t been changes of this scale for decades. It just goes to show how unsettled the London market is by the developments of the last few years.”
Watered-down protections
The UK’s corporate governance model has long been seen as a beacon of good practice.
Following the seminal 1992 Cadbury Report, there was a recognition of the benefits of good governance, and support for thoughtful stewardship and robust investor protection through the creation of the Corporate Governance and Stewardship Codes.
“All of this has helped UK investors influence corporate behaviour for the better, enabling us to act as effective stewards of our assets,” says Caroline Escott, Acting Head of Sustainable Ownership at UK pension fund Railpen. “And it’s done so without having to resort to the ‘harder’ regulatory, litigation and court-based investor protections that we see in the US, and which we think run the risk of damaging the trust between companies and their shareholders.”
Escott thinks UK policymakers have underestimated the extent to which robust investor protections have helped make London a “global financial powerhouse” and have failed to explore the impact of the listings reform through both a company and investor lens.
“Companies that decide to list in the UK are likely to demand the full extent of control they are now allowed to achieve,” she says. “Index investors will therefore be exposed to more companies where there are fewer opportunities to influence and create long-term value. Meanwhile, active investors may well decide to vote with their feet.”
It is the FCA’s decision to remove the need for shareholder votes on certain corporate transactions – shifting instead toward a more disclosure-based approach, in a bid to increase the agility of UK-listed companies – that has troubled investors the most.
Jen Sisson, CEO of the International Corporate Governance Network (ICGN), says she is concerned about the removal of shareholder voting on significant transactions, such as mergers and acquisitions.
The FCA has decreed that transactions meeting the 25% threshold will no longer require shareholder approval. Instead, companies will be expected to publish a transaction announcement and relevant details to enable shareholders to assess the terms and anticipated impact of the deal in question.
“There should be no reason why corporate management teams should be worried about having to ask their shareholders to approve things that they think are strategically the right answer [for the company],” says Sisson.
Shareholders tend to want a voice when significant transactions are on the table, due to the potential of such deals to materially or negatively impact value.
“Simply requiring disclosures, without accompanying mechanisms for investors to do anything about a transaction they may be unhappy about, fails to provide an appropriate level of protection,” Escott notes.
Similarly, the FCA has eased requirements for related party transactions. As such, companies will be expected to publicly state the planned transaction is fair and reasonable but will no longer need shareholder approval.
“What we’re essentially talking about here is corporate management doing deals with people and other companies they’re connected to,” explains Sisson. “There’s a risk of self-interest. Is the transaction best for the company or best for an individual? Having this accountability mechanism is very important [to shareholders].”
Saudi Aramco is a prime example of the kind of company this type of change may attract, Barker argues.
“One of the things that really put Saudi Aramco off from listing [in the UK], is the idea that a state-owned enterprise would need to secure the approval of other shareholders when making these [related] party transaction decisions,” he says. “On the other hand, if Saudi Aramco lists in London, shareholders are right to want to feel some security that the company isn’t going to suddenly decide to move half its assets out of the company and give them back to the Saudi government, for example.”
Not all shareholder voting rights have been scrapped by the FCA, however. Shareholder approval remains necessary for reverse takeovers and delisting.
Not all black and white
In light of mixed reactions to the listings reform from the investment industry, ESG Investor put these concerns to the FCA.
“Our rules encourage a wider range of companies to list and raise capital in the UK, increasing opportunities for investors and supporting the nation’s growth,” the regulator tells ESG Investor.
There has been some movement to suggest that companies are indeed looking at the LSE with fresh eyes, and may therefore add to the UK’s IPO pipeline. One of the most recent to have expressed interest is fast fashion giant Shein – although significant concerns as to the company’s social-related performance remain.
“[The listings reform] will remove unnecessarily burdensome rules and, in turn, attract more companies to the UK market, benefitting the economy,” says Annabel Brodie-Smith, Communications Director and Spokesperson at the Association of Investment Companies (AIC). “The revised rules will continue to be supported by the existing prospectus and market abuse regimes, company law, and wider stewardship and corporate governance processes.”
Railpen’s Escott, for her part, is doubtful that the changes will turn the tide and unlock a flood of new listings in the UK.
“Our engagements with pre-IPO companies highlight liquidity and valuations as two key determining factors for listing jurisdiction decisions – not the level of corporate governance safeguards,” she says. “We can therefore infer that reducing shareholder rights would have minimal impact on companies’ decisions regarding listing jurisdiction.”
While conceding that investors are “undeniably right to be concerned” about the FCA’s dilution of corporate governance standards, Barker takes a broader view – noting that London has long had a “pro-investor focus”, and that a “recalibration” to introduce more of a balance between investors and companies is necessary.
“As well as this, one of the problems investors have in terms of their own credibility in this argument, is that they often invest in companies [abroad] that have some of the characteristics they have been arguing against in the UK,” he says. “Many invest in US companies with DCSS, for example.”
In 2021, 77% of UK asset manager allocations in equities were invested in non-UK equities. According to the Office for National Statistics, 58% of ownership in UK companies is now held by investors based outside the country, whereas domestic pension schemes and insurers combined only hold 4% of the UK’s listed capital – down from almost 50% in the early 1990s.
The FCA also pointed this out to ESG Investor, echoing a speech made by its Director of Oversight – Clare Cole – earlier this year, within which she emphasised that “stewardship is more than just shareholder votes mandated by regulation”.
For example, although shareholders no longer have a mandated vote on significant company transactions under the new rules, they still have every right to vote against the reappointment of directors to the company board at the next AGM, Barker argues.
“Even if they don’t get a majority, they can send a compelling message to management,” he adds.
Vibrant future?
Beyond somewhat divergent opinions, many agree that changes to the UK’s listing rules aren’t the silver bullet to reinstating the country’s economy, and that there remain fundamental problems for the new Labour government and regulators to address.
“These include the lack of a long-term, sector-specific industrial policy that entices homegrown start-ups to remain and then list in the UK, fixing political and economic stability – providing a stable framework for long-term economic growth – and working to grow the pool of retail investors,” Railpen’s Escott suggests.
But before any of this can be tackled, the debate on reforming the UK market must become more constructive, according to Sisson.
“Part of the challenge is that this debate has become very antagonistic and polarised,” she says. “Wanting strong shareholder protections and rights is not about trying to fight with companies, but about making the whole system work together so we can all achieve financial goals through a series of checks and balances, and accountability.”
After all, investors, companies, regulators and the government – in theory – all want the same thing: a vibrant stock market with sustainable long-term returns.
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