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In post-war Paris, signs above kitchens often stated that the owner does his own cooking, testifying to the chef’s confidence in the dishes amid the food rationing of the time.
This phrase comes up in the debate over proposed reforms to the UK listing rules. Corporate governance bodies and pension funds are launching a coordinated last-ditch effort to thwart changes that would allow dual-class share structures (DCSS) without a mandatory sunset clause and remove the need for shareholder approval for major and related-party transactions.
In their letters to the British Financial Conduct Authority, the International Corporate Governance Network and a coalition of British pension funds make no bones about it. They argue that the rule changes could deter investment in British listed shares, drive up the cost of capital for British companies and erode London’s status as a financial center – a triple disaster for beleaguered Britain.
The pension funds state that the proposals (emphasis Alphaville):
. . . shall Making Britain less attractive as a destination for capitalwhich exacerbates current problems by making British listed companies less attractive to the kind of high-quality, long-term investors that both our pre- and post-IPO companies have. . . are looking for. In turn, this could be possible increase the cost of capital for UK listed companies because investors demand a higher return for the increased risk.
Similarly, the ICGN letter – co-signed by shareholder and governance groups from Portugal, Italy, Canada and Australia – argues that Britain’s high standards set it apart and attract investors from around the world. Relaxing it could deter the foreign investors who are vital to the London market (our emphasis again):
The UK’s reputation for high-quality listing and governance standards and the resulting confidence of foreign investors are both a competitive advantage and a positive differentiator for the UK market in a global context. According to the . . . Office for National Statistics, the proportion of shares in UK companies listed on the London Stock Exchange (LSE) held by foreign investors has risen to a record high of 57.7% of the value of the UK stock market in 2022. . . [B]The fact that the company is listed in the British premium segment is a strong signal has the highest standards of governance and is well positioned to prosper in the long term. . .[M]Arketintegrity is something that must be preserved and not diluted.
This language carries an implicit but unmistakable threat to divest from Britain.
The merits of the reforms are very balanced and hotly debated. The ICGN cites studies suggesting that the benefits of dual-class share structures disappear after seven years, although the letter does not allege any outright harm. In fact, it is not difficult to find counterexamples, and the area is indeed an academic minefield, with several studies struggling to find a link between governance and corporate performance. Whether DCSS enables visionaries or entrenches substandard management in the long term depends on numerous factors that fund managers elsewhere have been able to assess for themselves.
Whatever the pros and cons, two issues overshadow the conscientious objectors’ arguments. First, their investment choices contradict their statements. The majority of their stock portfolio is invested in companies and markets whose governance practices they disapprove of. Secondly, their assumption that high standards attract investment is unsubstantiated and probably incorrect in the UK context.
For starters, the institutions represented by ICGN appear to have little difficulty investing in markets with less stringent standards, such as the US and several European countries. The membership list includes some of the largest investors in dual-class share structures and in markets that do not require shareholder approval for significant and related party transactions. Presumably the corporate governance at these other locations is good enough to make their listed shares investable.
So there is a clear disconnect between the advocacy of the governance groups and the actions of the investment teams. The ICGN letter does not address the inconsistency or explain why Britain should maintain uniquely stricter standards than the other markets in which its members are keen to invest.
British pension funds have meanwhile largely abandoned the domestic stock market, which accounts for four percent of total assets. Pension funds have withdrawn much of their assets from listed shares, and to the extent they are still invested, they hardly hold any UK shares. Take this snapshot from feature author Railpen’s fact sheet about his Global Equity Fund:
Or the announced allocation of the “Global Investments (up to 100 percent equity) Fund” of the co-signing People’s Partnership:
And the top 10 holdings are all American and include companies with multiple share classes:
It’s a similar story with another signatory, Brunel Pension Partnership. The top twenty of each of the four non-regional “Active Equity” funds includes only one UK-listed stock; the 80 names are predominantly American and include dual-class share structures and even some Chinese companies.
This is not a criticism of their investment decisions. On the contrary, multi-class stock companies like Alphabet and Meta were phenomenal stocks to own! But the critics’ investment choices mean their implicit threat to pull their money from the London market rings hollow. British pension funds, as HSBC analysts recently noted, have ‘nothing left to sell’.
With so little skin in the (listed British) game, the pension funds can hardly be described as ‘vested interests’. Rather ‘uninvested interests’.
Similarly, it is difficult to give much credence to the groups’ claim that London’s gold-plated standards attract investment and thus result in a lower cost of capital. The commentators do not cite any research to support this claim; Nor are they trying to reconcile this with the low rating and continued underperformance of UK equities.
While the ICGN and UK pension funds warn that lowering governance standards could deter investment, their own investment practices suggest a more nuanced reality. It is probably more accurate to say that once governance reaches an acceptable level, other factors take precedence. Overly strict standards may not attract investment and may even be counterproductive by distracting management or discouraging companies from going public.
The proposed listing reforms are the first baby steps in the campaign to rehabilitate London as a stock market after a torrid period marred by delistings, reduced liquidity and an IPO drought. Much more will need to be done, especially in the areas of pensions, insurance and taxation, and these efforts will provoke criticism, debate and opposition from various interest groups. It would bode ill for the city’s revival if Britain couldn’t even adjust the city’s listing rules to bring it in line with the rest of the world.
It’s a fine line between being principled and conceited, and Britain has benefited little from wearing the hair shirt of its stricter standards.