Graveyard Gamble: UK Listing Reforms Are a Risky Bet

In
2023,
the
FRC
put
out
to
consultation
18
proposals
to
revise
and
extend
the
Code.
However,
in
November,
the
regulator
took
many
by
surprise
in
deciding
not
to
take
forward
most
of
those
ideas.
The
proposed
revisions
were
intended
to
be
the
vehicle
for
delivering
the
bulk
of
earlier
government
proposals
to
reform
the
corporate
governance
and
audit
framework
in
the
UK
–
proposals
that
were
also
themselves
pared
back.

The
main
proposed
change
in
the
latest
set
of
revisions
is
boards
of
UK
companies
would
declare
via
the
annual
report
how
they
have
monitored
and
reviewed
the
effectiveness
of
“material”
financial,
operational,
reporting
and
compliance
controls
–
a
much-reduced
scope
from
the
originally-proposed
US-style
management
attestations
over
such
controls
(known
as
“SOX”).

Why
The
Change
in
Direction?

To
answer
this,
it’s
important
to
understand
what’s
happened
over
the
last
half-decade.

Concerns
over
sudden
failures
of
UK
businesses
–
such
as
Carillion,
Patisserie
Valerie,
and
others
–
have
prompted
a
host
of
proposals
to
strengthen
the
corporate
governance
framework,
such
as
those
described
above.

Alongside
that,
new
listings
on
the
London
market
have
all
but
dried
up,
and
the
less-than-stellar
performance
of
companies
that

have
listed
in
recent
years
–
Deliveroo
(ROO),
Aston
Martin
(AML)
and
CAB
Payments
(CABP)
among
them
–
hasn’t
helped.

And
then
there
was
Arm.

The
decision
by
former
London-listed
chipmaker
Arm
(ARM)
to
list
in
New
York
was
a
particularly
tough
pill
to
swallow
for
cheerleaders
of
the
UK
market,
who
have
seen
a
slew
of
young
UK
businesses
list
in
the
US
over
recent
years,
attracted
by
that
market’s
higher
valuations
and
its
reputation
as
a
home
for
growth
companies.

The
Magnificent
Seven
(Apple
[APPL],
Microsoft
[MSFT],
Alphabet
[GOOGL],
Amazon
[AMZN],
Nvidia
[NVIDIA],
Meta
Platforms
[META],
and
Tesla
[TSLA])
is
just
one
example
of
an
astonishing
market
success
a
long
time
in
the
making.

Meanwhile,
several
large
companies
–
including
names
like
Tui
(TUI),
Flutter
Entertainment
(FLTR)
and

CRH
(CRH)
–
plan
to
de-list.
Many
more
companies
are
being
lost
to
takeovers,
particularly
in
the
small
cap
sector
of
the
market,
as

a
recent
analysis
by
broker
Peel
Hunt
points
out.

In
the
face
of
all
this,
corporate
governance
changes
–
seen
as
burdensome
by
a

government
keen
to
prioritise
deregulation
–
have
been
reduced
to
a
minimum.
Instead,
policymakers
are
prioritising
the
removal
of
restrictions
seen
as
unattractive
to
new
businesses
seeking
to
list.
As
City
minister
Bim
Afolami
puts
it,
“if
you’re
regulating
a
market,
in
any
area,

there’s
no
point
having
the
safest
graveyard.”

The
changes
include
new

listing
rules
permitting
a
greater
role
in
public
markets
for
companies
with
“dual
class”
share
structures
that
permit
company
executives
greater
voting
power
than
other
shareholders;
as
well
as
changes
in
the
“free
float”
requirement,
meaning
the
percentage
of
a
company’s
shares
that
must
be
available
for
public
sale
will
fall
from
25%
to
10%.

The
Capital
Markets
Industry
Taskforce
–
a
body
chaired
by
London
Stock
Exchange
chief
executive
Julia
Hoggett – is
seeking
to
reverse
the
London
market
decline,
and
welcomes
the
rollback
of
corporate
governance
stipulations.
It’s
even

pushing
for
more.

A
Huge
Gamble

However,
concerns
remain
that
the
existing
corporate
governance
requirements
are
in
fact
an
important
pull
factor
for
investors.
For
example,
dual-class
share
structures
are

a
particular
source
of
consternation
for
many
institutional
shareholders,
who
believe
they
entrench
management
and
reduce
its
accountability.

Looking
overseas
has
not
always
proven
to
be
a
panacea
either.
UK
companies
seeking
success
in
the
US
have
not
always
found
it
to
be
an
easy
ride.

Several
businesses
that
listed
in
New
York
via
special
purpose
acquisition
companies
(SPACs)
over
the
last
few
years
have
largely
not
lived
up
to
expectations.
A
2023
study
by

Bloomberg
and
the
London
Stock
Exchange
indicated
an
investor
in
13
British
SPAC
companies

would
have
lost
90%
of
their
investment.

Furthermore,
with
the
US
being
the
home
of
SOX,
reporting
burdens
are
often
higher
in
that
market
compared
with
the
UK.
Investor
perception
is
that
the
cost
of
compliance
in
the
US
is
more
than
offset
by
the
lower
cost
of
capital.

Overall,
the
UK’s
deregulation
push
is
a
big
bet.
Even
now,

companies
seeking
a
London
listing
cite
the
market’s
strong
corporate
governance
as
a
key
factor.
Maintaining
that
reputation
while
attracting
the
growth
companies
of
the
future
will
be
crucially
important.

Lindsey
Stewart,
CFA,
is
director
of
investment
stewardship
research
at
Morningstar,
and
the
former
head
of
stakeholder
engagement
at
the
FRC

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