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Memo to economic policymakers. Global capital is unhappy with the deleterious impact of competition between financial centres on standards of corporate governance and shareholder protection. That much is clear from the pungent critique of proposed reforms to the UK listings regime advanced this week by the International Corporate Governance Network, a club of global institutional investors who manage a weighty $77tn of assets.
The watering down of governance safeguards in the Financial Conduct Authority’s listings blueprint follows a marked decline in initial public offerings on the London Stock Exchange. Rishi Sunak’s government also worries about UK pension funds’ severe neglect of domestic equities. Yet the thrust of this move to lighter touch regulation is quixotic.
Among the ICGN’s main concerns is the removal of shareholder votes before significant transactions such as takeovers. Given that Britain’s two greatest postwar manufacturing companies — Imperial Chemical Industries and the General Electric Company — were reduced to corporate rubble by overambitious bid activity, rolling back shareholder checks and balances on such deals stretches the meaning of the word reform. The rule change amounts to a warm gesture to investment bankers and other professionals who harvest dealmaking fees.
Next is the removal of shareholder votes on related party transactions. This looks bizarre in the light of governance implosions involving questionable treatment of minorities by dominant shareholders at UK-listed foreign resource companies Bumi and ENRC.
Then there is the more permissive approach, including the abolition of mandatory sunset clauses to dual-class shares whereby a minority of shareholders are granted superior ownership rights. The issue is tricky in terms of financial centre competition given evidence that dual-class companies have higher valuations at the time of their IPOs. But the premium dissipates over time, so permissive regulation delivers a questionable win.
It is not so surprising, then, that the ICGN claims the new regime will undermine the UK as a global financial centre, expose investors and pensioners to undue risk and undermine institutional investors’ stewardship role.
Some may find the UK government’s attitude hard to fathom in light of all this. The post-Brexit trade deal struck in 2020 made minimal provision for financial services. Yet the authorities now risk undermining a corporate governance regime regarded as the gold standard in their pursuit of international competitiveness.
In fact, worries about the City’s competitive position are heavily exaggerated. Despite Brexit, London is hanging on to second place after New York in Z/Yen Group’s Global Financial Centres Index, ahead of Singapore and Hong Kong. In 2021, IPOs in the UK raised £14.7bn. That compares with gross international bond issuance in the UK that year of $1.1tn. At the end of 2022, the outstanding value of the UK’s international bonds was the highest in the world at more than $3.2tn, $800bn more than the US. The City’s other important earners were foreign exchange trading, cross-border lending, asset management and insurance. Equities trail by a mile.
This underlines the point made by Michael Howell of CrossBorder Capital that the chief task of modern financial systems is refinancing the mountain of debt on which economic growth increasingly depends. In other words, policymakers’ mindset is based on an outdated model of what financial centres do and the role that IPOs play in competitiveness.
As for their anxiety about UK pension funds’ shrunken equity holdings — it amounts to a denial of globalisation. Foreign investors have filled the equity gap, now owning more than half of the UK equity market. And with their ownership stake rising from 56.3 per cent to 57.7 per cent between 2020 and 2022, they clearly stumped up when the pandemic called for substantial capital raising. Meanwhile, foreign venture capital investment in the UK in 2021 totalled a far from paltry £37.9bn.
Of course, it would be good if more domestic pension fund money went into venture capital. The government’s efforts to make it easier for defined contribution schemes to do this make good sense. But its underlying assumption that corporate governance can be an impediment to economic growth does not. There is a risk that lighter-touch listing regulations will saddle quoted UK companies with a higher cost of capital while providing an entrée for more dodgy foreign companies into the London Stock Exchange.