Debate over changes to listing rules roils U.K.

Money managers and market players are split on whether recommendations to amend U.K. listing rules are a good idea from a governance point of view and the right way to attract more capital to London.

The U.K. Listings Review, published last month and chaired by Lord Jonathan Hill, was launched by the U.K. chancellor of the exchequer in November to ensure the U.K. could stand up to "stiff competition as a financial centre" from the U.S., Asia and elsewhere in Europe, a document of the review said. Mr. Hill is a former European Commissioner, financial stability, financial services and Capital Markets Union.

One of the suggestions is to introduce dual-class share structures to U.K. "premium" listings — companies that have the potential to be included in the FTSE 100 and FTSE 250 — moving away from the one share, one vote model of what sources said was a "gold standard" among global markets.

"At a high level, there's this real tension," said Ashley Hamilton Claxton, London-based head of responsible investment at Royal London Asset Management. "We're big advocates of good governance … (but) there's this tension about being able to attract capital to list in London" — particularly technology businesses that tend to go to the U.S. or Hong Kong where there might be lower listing standards, she said.

Under dual-class structures, a company will typically have two classes of shares — one with the right to one vote per share, while the other has a high or "super" vote, usually carrying 10 or 20 votes per share.

In the U.K., premium-listed companies are prevented by the Financial Conduct Authority's principles from offering shares with differently weighted votes.

The FCA now needs to consult on any changes it might make to listings rules — including other proposals such as removing a barrier that deters special purpose acquisition companies from listing in the U.K. — based on the recommendations.

While the debate over amending U.K. listings rules has popped up over the years, the review is particularly relevant now: Between 2015 and 2020, London accounted for only 5% of initial public offerings globally.

"We need to get the balance right. London does need to attract capital, but needs to maintain good governance standards," Ms. Hamilton Claxton said.

The review said any changes must come with certain conditions, including introducing investor protections such as sunset clauses, which put time frames on how long something such as a dual-class structure may operate.

While some welcome the changes with protections and provisions in place, many in the industry oppose the proposal.

"We discourage it and most of our members do as well," said George S. Dallas, policy director at the International Corporate Governance Network in London.

The ICGN's case on why dual-class structures are a bad idea begins with common sense. While stewardship codes aim to "empower investors and encourage them to be good and active stewards, the explicit purpose of dual-class structures is to water down (that ownership). It is regulatory schizophrenia — they want to give investors power, but not real power. That's an issue," Mr. Dallas said.

Caroline Escott, London-based senior investment manager, active ownership at RPMI Railpen, agreed that dual class structures "dilute market discipline and the ability of minority shareholders like Railpen properly to hold companies to account, with voting control skewed in the interests of the few who own those share classes with superior voting rights."

The firm, which runs about £31 billion ($42.9 billion) for railway pension plans, welcomed the safeguard proposals — something it had called for — but still believes "these new proposals will make it harder for long-term investors to undertake the effective stewardship of individuals' savings which the government has been laudably keen to encourage through other recent initiatives," Ms. Escott said in an email.

Joe Dabrowski, London-based deputy director of policy at the Pensions and Lifetime Savings Association, also highlighted that investors are seeking and increasingly required by U.K. law "to positively influence corporate behavior." Introducing the changes "would be a backwards step and risks reducing the U.K.'s strong reputation for high corporate governance standards," he said in an email.

The changes would also mean less accountability from companies, said Tom Powdrill, London-based head of stewardship at corporate governance and shareholder advisory firm Pensions & Investment Research Consultants Ltd., in an email. "Dual-class share structures are designed to protect management from challenge by those who have provided capital to the company (which) seems unlikely to contribute to positive governance outcomes."

The Principles for Responsible Investment thinks that weakening existing rules risks "undermining confidence by institutional investors and could reinforce concerns around a potential global race to the bottom," Athanasia Karananou, director, corporate governance and research in London, said in an email.

Some money managers agreed.

Legal & General Investment Management Ltd. will continue to push the FCA on the issue of one share, one vote "as a matter of principle," said Sacha Sadan, London-based director of investment stewardship, in an email.

Andrew Millington, head of U.K. equities at Aberdeen Standard Life in Edinburgh, agreed in a separate email that the recommendations "represent an important evolution of U.K. equity markets in strengthening the U.K.'s position as a global financial center …(but) any measures aimed at encouraging companies to list and raise capital in the U.K. must be balanced with high standards of governance." While the firm has "strong reservations" about introducing dual class structures, the suggested safeguards were welcomed.

Another concern is that the "great access to directors" that managers currently have may change under dual-class structures," RLAM's Ms. Hamilton Claxton said. "If we want to meet with the chairman of a FTSE 100 company, it's very rare we get turned down."

It's a different experience in other markets such as the U.S., where Securities and Exchange Commission rules do not prohibit the use of dual-class structures on public markets. The listings review said 20% of companies listing in the U.S. used dual-class structures between 2017 and 2020, vs. fewer than 10% in 2016.

However, other money management executives are not against the introduction of dual-class structures to U.K. premium indexes — provided provisions are in place.

"The big question for investors to consider is whether the principle of one share, one vote should be considered a price of entry to capital markets, or whether it should be considered as a governance destination," said Jeremy Richardson, senior portfolio manager, global equities at RBC Global Asset Management (U.K.) Ltd. in London.

Coming to the public market shows a maturity of the business. "Allowing other shareholders to now participate in this company, taking it from private to public, is a stage in the company's natural development as it grows," Mr. Richardson said.

Investors can also benefit from diversification in terms of new companies to invest in. While he thinks the one share, one vote concept "should be retained as a gold standard," Mr. Richardson "would be open to thinking about permitting under certain circumstances super voting shares for, in particular, (company) founders."

Dual-class structures can keep company founders who have long-term ownership in mind and who are "strong drivers of the ethos of the business, its purpose, its culture" on board as a company matures to public ownership — something that can benefit both parties. "But the key thing here is the presence and use of sunset clauses," Mr. Richardson said.

An important clause is that any super voting shares remain in the hands of founders, reverting to ordinary voting shares once that person relinquishes the shares rather than being gifted or bequeathed, Mr. Richardson added.

Sudhir Roc-Sennett, New York-based head of ESG at Vontobel Asset Management's quality growth boutique, agreed that provisions are needed but said the proposal is "fresh thinking," with dual-class structures fitting into the box of "acceptable risks" for investors.

But if investors think it is an acceptable risk, it is key that investors have visibility of controlling shareholders' goals "so they can value the potential against its inherent risks," he said.

Overall, "we feel dual voting would not be something bad for the long term, as long as shareholders can understand what the controlling shareholders are trying to achieve. We don't think it brings more risk than, say, highly cyclical or poorly run businesses," Mr. Roc-Sennett said.

And Peter Harrison, group CEO at Schroders PLC, said in a notice on the firm's website March 4 that the firm "is in full support of Lord Hill's review. It is crucial that we do all we can to make the U.K. the most attractive place for companies to list and to do business for the benefit of investors."

He said a balance is needed "between ensuring the highest standard of governance and supporting the growth of companies and the U.K. economy. Lord Hill's review achieves that balance," adding that the announcement "should encourage more innovative and pioneering businesses to list in the U.K."