The UK listings review proposed by the Treasury,
including the introduction of dual class shares with different voting rights for
shares listed with the London Stock Exchange, has not been welcomed by
investors.
The review is led by
Jonathan Hill, former European Commissioner for Financial Stability, Financial
Services and Capital Markets Union and a Member of House of Lords. A consultation
closed on 5 January and the review will continue in early 2021.
Lord Hill’s review is seen as an attempt to
ensure that the UK remains an attractive place to list after Brexit, as
competition increases from other stock exchanges in Europe and beyond that have
relaxed listing regimes and corporate governance frameworks.
Athanasia Karananou, Head of Corporate
Governance at the Principles for Responsible Investment, tells RI that dual
class shares can severely undermine the effectiveness of stewardship and the
power of institutional investors to hold companies accountable. “Weakening the
existing rules to effectively allow such structures would appear to be
regressive and contrary to the high corporate governance standards of the LSE
premium listing segment,” she explains, adding that the proposal could affect
investor confidence and “reinforce concerns around a potential global race to
the bottom” resulting in lower governance standards and investor protections
globally.
The International Corporate Governance Network
(ICGN), the investor body whose members represent $54trn (€44.3trn) in assets under
management, labelled the proposal “a trade-off that waters down regulatory
standards at the expense of investor protection”.
In its response to the
consultation, ICGN said: “This public consultation makes clear that dual class
offerings and lower free float are both on the table, our clear message to you
is that such developments would be unwelcome by a substantial number of
institutional investors globally.”
ICGN said that while sympathetic to concerns of
short-termism that might lie behind Lord Hill’s review, dual class shares are a
seriously flawed tactic with unintended consequences.
“Weakening
the existing rules to effectively allow such structures would appear to be
regressive and contrary to the high corporate governance standards” - Athanasia
Karananou, PRI
The main UK retail investor bodies, the UK Shareholders’ Association and
ShareSoc, have also opposed the plans, with / Cliff Weight,
ShareSoc’s Director, labelling it as “utterly misguided” and “a race to the
bottom” by attempting to improve the UK market by relaxing corporate governance
standards.
“This review has focussed on what can be done to
make the UK a more attractive regime for companies to list, where perhaps a
more important consideration is what can be done to make the UK a more
attractive regime in which to invest,” he went on. “The key point is that the
stock market is now global, the marginal costs of investing in UK shares are
excessive, and the returns from UK shares have been below average.”
Weight added he would
prefer stronger standards in light of the most recent accounting and auditing
scandals such Carillion, Thomas Cook, Conviviality and Patisserie Valerie.
PIRC, a UK governance consultancy advising the
Local Authority Pension Fund Forum, also opposed the relaxation of governance standards
in its response to the review.
Alan MacDougall, PIRC Managing Director, wrote:
“Problems with the collapses of NMC Health (a FTSE 100 company) and Finablr (a
FTSE 350) company predated COVID, and appear to us to be a result of previous
measures to relax the Listing Regime.” He suggested that listing requirements
should be instruments of Parliament, and subject to its authority, to minimise
“many of the problems caused by [corporate advisory side] lobbying”.
Other jurisdictions already allow dual class
shares, among them the US, Hong Kong and Singapore. In Europe, the Netherlands features
prominently. According to Rients Abma, Executive Director of Dutch governance
organisation Eumedion, it is referred to as the ‘Delaware of Europe’ due its
flexible company laws.
Abma tells RI that five listed companies have
dual-class shares: Prosus (with a 1:1000 ratio), Altice Europe (1:25), Trivago (1:10),
Yandex (1:10) and Digi Communications (1:10). In addition, six firms have
issued loyalty shares for long-term shareholders (i.e. their founders): Stellantis
(the merger of Fiat Chrysler and Peugeot), Ferrari, CNH Industrial, Exor,
Campari Group and Cnova.
Abma said the current political climate favours
loyalty shares and dual-class shares because politicians believe that those share
structures can attract new company headquarters. “Last year Campari Group
decided to relocate from Italy to The Netherlands and Fiat Chrysler and Peugeot
decided to establish its joint headquarters [now Stellantis] in Amsterdam,
leaving London and Paris behind. Also CureVac [involved in a Covid-19 vaccine]
decided to relocate its statutory seat from Germany to The Netherlands as the
company can protect itself better against possible hostile bidders, after the
Trump intervention in April 2020.”
Spain is the next European country that will
introduce loyalty shares, although as an option that shareholders should
ultimately approve. The reform is still being discussed in Parliament.
Research reviewed by Alex Edmans,
Professor of Finance at the London Business School, suggests that dual-class
structures are “undesirable for most firms”.
He says academic evidence suggests that
dual-class shares entrench management and allow it to pursue its own interests
rather than protecting a firm’s entrepreneurial vision and fostering long-term
investment.
According to Edmans: “Dual-class shares will severely
hinder shareholders from engaging, worsening the problem of disengagement and
the ownerless corporation.”
