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Don’t let the governance guard down in IPO razzmatazz

ShareSoc Member Barry Gamble has contributed this article.

Background

My recent Financial Times letter  “Don’t let the governance guard down in IPO razzmatazz” argued against relaxation of the governance requirements under the listing and AIM rules.

Thirty years ago the scandal surrounding the business affairs of publisher Robert Maxwell prompted the Cadbury report. This defined corporate governance as “the system by which companies are directed and controlled.”

Numerous other reports, directives, rules, regulations, prescribed checklists and best practice guidance have followed since. This confection, including Market Abuse Regulations and the dreaded MIFID II, would likely benefit from some simplification but the principle is all about achieving trust and respect between boards and their shareholders; the agency principle.

We still see far too many examples of governance falling short. So why, decades on from Maxwell, is this still quite so difficult ?

Governance in Practice

To be investable a company needs to show it has good ethical values, a strong responsible culture and adopts the right behaviours. That it has a board transparent in its actions so that shareholders are not left in the dark as to what is going on with their company.

Corporate Governance takes effort and commitment. It is not theoretical box ticking but it is totally compatible with an entrepreneurial board style. It’s though not achieved by the “boiler plate” disclosure one sees with some AIM companies adoption of the QCA Code; reproducing something akin to  a “model answer” for the annual report and website disclosures. That’s just form over substance.

It is not all down to boards. By being engaged shareholders, institutional investors have a key part to play; applying the FRC Stewardship Code, not turning the Nelsonian eye on tricky issues and avoiding the  outsourcing of governance to, largely formula driven, Proxy Advisors.

In our nominee driven system private shareholders are often unable to vote their shares so active institutions are critical to the interests of individual shareholders.

Regulators and Advisors

Regulators could do with being more visible in following through. From a long list we might mention The Financial Conduct Authority, The Financial Reporting Council and The Takeover Panel.

It’s shareholders which foot the bill for generous fees paid to advisors – brokers, lawyers and auditors amongst them – when prospectuses, circulars and other documents require sign-offs in accordance with regulations and market practice. But without more overt monitoring, naming and shaming how do shareholders derive value from this spending of their money ?

We should not underestimate the counterforces. Arguing that corporate governance costs too much and, perhaps even with some validity, takes up scarce attention bandwidth, some boards may submit to the siren call of the private markets. Such de-listing or AIM de-admission almost certainly needs more safeguards for shareholders which in good faith invest in shares in a public market only to see them removed from that arena.

So, even with the existing protocols, good governance, the G in ESG, is not easily achieved.

Listing Standards

Against this background the recent £5 billion LSE standard listing IPO of, loss making, The Hut Group – with just two pages of its 200 page prospectus devoted to governance – has raised many an eyebrow. The founder and major shareholder is both executive chairman and chief executive as well as being the company’s landlord.

In addition there is an executive bonus scheme linked to share price, which could soon be worth several hundred million pounds and, finally, the founder has a golden share to block an early change of control.

The LSE defends this governance regime, which is very much less rigorous than that for AIM, by arguing that this interpretation of the rules aligns with other major European exchanges. Recent submissions, by the LSE and other market operators, to the Treasury review of the UK Listing rules, continue the line.

Right-thinking non-executive directors doing their best to encourage a good approach to governance could be left with a feeling of why are they bothering ?

They know why, of course, but it would help if the London Stock Exchange and other actors might take the lead so as to be more consistent in the application and monitoring of governance requirements across markets.

Any relaxation of standards, in particular the equal treatment of all shareholders, is bound to impact the atmosphere and mood music of corporate governance more generally.

It may not end well.

About the Author

Barry is Chairman, The NED City Debates. As well as being a private investor, Barry is an experienced board director. He has led an AIM IPO, secondary fundraisings, including working with The Takeover Panel, and an AIM de-admission. Through a role as Senior Advisor at Boudicca Proxy he also has experience of  activists, institutions and corporate boards in shareholder engagement and activist scenarios.

Alongside board advisory and non-executive roles he regularly writes and speaks about the challenge of board best practice working with a range of organisations and media outlets. The letters columns of the Financial Times have published a number of his views on board best practice and corporate governance. He was Editor-at-Large at Board Room magazine.

7 Comments
  1. Roger Lawson says:

    Totally agree with all Barry’s comments. Dominance of one shareholder is fine when the business is doing well, but when it is not it can obstruct change and often then gets taken private at a low price.

  2. Michael Darbyshire says:

    I agree with Barry. It is rather unfortunate that memories of Maxwell and his doings do not seem to have lasted well enough. The start of his pillaging took place in Pergamon about 60 years ago. An enquiry into the scandal involving a senior QC and a former president of the English Institute concluded that “Robert Maxwell had difficulty in distinguishing between his own assets, and those of the company he managed”. This was clearly exemplified by his treatment of the pension assets of the Mirror staff. The report had recommended that because of his behaviour RM should be excluded from acting as a director of a public company ever again.
    Thanks to his great charm and the loss of memory he persuaded the London Stock Exchange, the legal, accounting and banking authorities that the judgement was unreasonable – and then he started all over again.

  3. Mark Bentley says:

    Grrrr… according to this FT article: https://www.ft.com/content/a9e9de26-7f44-41e1-9dd6-3721a52c7d9c the government is determined to ignore our views and make the London market a free-for-all in the name of “competitiveness”. Expect to see:

    – Dual share class structures
    – Lower minimum free floats
    – SPACs

    …and investors shafted as the unscrupulous take advantage of more relaxed rules.

    Of course, we can boycott such listings and funds/trusts that invest in them. I suggest making our views very clear to any funds/trusts we invest in.

  4. Amit VEDHARA says:

    @MARKBentley Tracker funds may not have a choice. The investors in those funds get the good with the bad and the downright ugly

  5. Cliff Weight says:

    Mark, it is a bit more complicated than that. Index tracker funds track an index, so if your index excludes companies where the shares are controlled by one shareholder, or one where shares with less than 25% are listed, or .. etc then your will not be investing in such companies.

    I can recall when dmgt (Daily Mail) was excluded from FTSE350 index as the ordinary shares were controlled by Rothermere Continuation Limited.

    FTSE4Good has strict criteria on what companies are eligible for inclusion. The creation of indexes has become quite big business. FTSE, Russell, Solaris, etc are all big players.

    It will be interesting to see how the Index providers decide how to deal with the new looser listing requirements.

  6. Barry Gamble says:

    Financial Times letter today from George Dallas,International Corporate Governance Network – “Investor concerns are not served by dual-class structures”.

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