It’s only four years since the Eurasian Natural Resources Corporation (ENRC) unceremoniously delisted from the London Stock Exchange after a series of very public corporate governance failures.
When asked afterwards whether London would learn any lessons as a result, City veteran Sir David Cooksey, said London had a very short memory and that “these things go in 10-15 year cycles; everything will loosen up”.
But as the recent launch of the Financial Conduct Authority’s (FCA) consultation on sovereign-owned companies shows, he underestimated how short that memory is.
Rather than remembering the lesson of ENRC, the FCA’s proposals remove much of the regulation put in place as a result to protect investors in companies with a controlling shareholder. The FCA wants to create a new premium-listing segment for sovereign companies, making it easier for them to list their shares in London by diluting certain stockmarket rules.
As the UK leaves the EU, business leaders and the government have both expressed a clear desire to signal that we remain open for business.
While the Institute of Directors (IoD) firmly agrees in the importance of London’s role as a leading international financial centre, we are not willing to compromise our world-class corporate governance. Instead, we should see good corporate governance as a means to enhance business performance, protect investors and maintain the reputation of UK firms.
All this buzz may be around the possible London listing of Saudi Aramco, and while it has indeed triggered this debate, the question around sovereign-controlled companies is of much greater significance to UK corporate governance.
The FCA proposals contain two major red flags. We see little justification to water down rules, and to treat sovereigns as different to other controlling shareholders. As they stand, the proposals do little to address the risks surrounding sovereign-controlled companies, including the potential for politically-motivated interference by the state-owned part of the company.
The consultation argues that sovereign controlling shareholders are radically different, and should be subject to less strictures than other controlling shareholders. It is difficult, however, to see how the nature of the shareholder changes the need to protect minority shareholders.
The IoD has no objection to creating a sub-set of the premium listing category, but we argue that the rules should actually be strengthened for sovereign-owned companies.
It is important to remember the embarrassment to the City that came from the ENRC case.
Along with another problematic natural resources listing from Bumi (which eventually delisted), it led regulators to shake up the rules to give investors greater power against controlling shareholders. The FCA stated at the time that “by safeguarding minority interests from abuse by controlling shareholders, these changes will promote market integrity and empower minority shareholders to hold the companies they invest in to account.”
As far as we can see, nothing has changed in the intervening years to lead the FCA to decide that these very same protections should be removed now, especially for sovereign-controlled companies.