Does the UK stock market need the biggest shake-up since the 1980s of the rules that apply to listed companies? Well, it’s hard to deny that something has gone wrong – and was going wrong before the Japanese owner of Arm Holdings delivered the latest snub by opting to list the Cambridge-based chip-maker, the UK’s tech champion, in New York.
The number of companies with a listing on the main market in London has fallen by 40% since 2008. Meanwhile, UK pension funds and insurance companies have scarpered to the perceived safety of bonds. They owned 52% of the market in 1990; now just 4%. The buzz ain’t what it used to be. And, since a dynamic stock market tends to go hand in hand with wider economic health, decline matters.
So, in assessing the FCA’s proposals, the default position should be openness to change. Something needs to happen to make London “more accessible, effective, easier to understand and competitive”, as the regulator’s chief executive, Nikhil Rathi, puts it.
Here’s the problem, though. For all the spin, the grand plan could be summarised “if you can’t beat ‘em, join them” – them being the US markets that have never shared London’s worries over shareholder rights and boardroom governance. It looks as if the UK financial authorities, prodded by ministers, have concluded that principles are great until they starting costing you business.
The FCA’s core proposal is to adopt a single class of listed company. So goodbye to London’s “premium” segment that could only be claimed by companies that signed up to strong governance standards. And, just as in the US, companies would no longer have to gain approval from shareholders for very large transactions, or ones with related parties.
What’s more, London would fling the doors open wider to companies with US tech-style unequal voting structures. So much for “equal rights for equal economic risk” – an entirely worthy cause, as many of us have argued for years. Thus it is hard to summon much real enthusiasm for the FCA’s vision. In governance terms, it looks a step backwards by about half a century.
But here, unfortunately for us purists, is the rub: there is little point in trying to operate the world’s most protection-heavy and virtuous stock market if fewer and fewer people want to use it. That way lies irrelevance.
And, since the theoretical governance protections have proved useless in preventing blow-ups like Carillion and NMC Health, one can reasonably ask if London’s high-minded ambitions were always hot air. Thus it is possible to see the regulator’s policy U-turn as simultaneously depressing and pragmatic.
It’s not just the US, note, that doesn’t bother with the confusing “premium” and “standard” categories; virtually nobody else does. On shareholders’ deal-blocking rights, yes, one can applaud the principle while also seeing how they can deter new arrivals. A UK premium-listed company, currently required to issue a prospectus to complete a big deal, is at a disadvantage versus a foreign-listed rival when competing to buy the same asset.
Whether or not the related party rules were the clincher in the Arm case (accounts differ), it is clear that listing in London is perceived as coming with hassles. The prestige may still count in some quarters, but not in all. Sir Jonathan Symonds, chair of GlaxoSmithKline, said last week that “scales are tipped against” listing in London, an assessment that rings true at the smaller end of his industry. Biotech is a growth industry for the UK, but a chunk of the best companies head straight to New York.
Rathi concedes the proposed new set-up “will mean passing greater investment risk to investors and greater responsibility to shareholders to hold the companies they own to account”. In other words, look out for your own interests because the regulator won’t be holding your hand. Yes, it’s best to be candid about what this new philosophy would mean: risks would be greater. There is no free lunch.
One suspects the FCA will come under pressure to soften a few proposals – especially the ones on shareholders’ ability to block stupid deals advanced by over-ambitious managements. And the FTSE Russell, the main index provider, could do everybody a favour by inventing a product that filters out companies led by wannabe Zuckerbergs waving their grubby golden shares.
In the round, though, the FCA’s ideas deserve a fair hearing. The way things are currently going, the UK stock market is headed for the stability of the graveyard. That suits nobody.
