Bumi and ENRC debacles mustn’t destroy our competitive listing regime

Roger Barker
THINGS have gone from bad to worse at Bumi and ENRC. On 22 April, Bumi’s shares were suspended after it failed to meet a deadline for publishing its 2012 results. On 25 April, the Serious Fraud Office launched an investigation into ENRC due to allegations of corruption.

Bumi and ENRC were once part of a wave of foreign listings in London. The idea was to join the growth prospects of emerging markets enterprises with the UK’s respected corporate governance regime. But in the wake of recent problems, the London Stock Exchange has been criticised for bringing to market companies dominated by controlling shareholders, and which violate expectations of ethical practice.

Responding to these concerns, in October 2012 the FSA published proposals for new listing requirements that would apply to any company with a “controlling shareholding”, defined as a shareholder controlling 30 per cent or more of the voting shares. These will require the signing of so-called relationship agreements, stipulating that controlling shareholders will not influence the day to day running of the firm. In addition, there will be a mandatory requirement for a majority of independent directors on the board and a new dual voting requirement for the election of independent directors. This could allow minority shareholders to potentially delay board appointments by up to 90 days.

The aim is to reduce the ability of large shareholders to dominate decision-making and to place greater power in the hands of a independent directors. The newly-constituted FCA’s decision on whether to implement the proposals is expected soon.

But there is little evidence these measures will work. Relationship agreements have been used before, with little success. A basic principle of shareholder democracy – which allows any director to be removed by a majority vote – will also always give controlling shareholders the power to control the board and thus the firm. The proposals will not alter this fact.

A more general reason for rejecting the reforms is that they introduce a more prescriptive governance regime for companies with a particular type of ownership structure. Blockholder-owned companies will no longer be subject to the UK’s “comply or explain” approach, based on the UK Corporate Governance Code, in a number of key respects.

This would be unfortunate . Some of the world’s most successful firms – Microsoft, Amazon, Google and BMW – have large individual shareholders. The structure can confer competitive advantages, including the ability to take a longer-term perspective due to the “patient” shareholding approach of the major shareholder. There is also no compelling evidence that widely-held corporations perform better commercially or that they are “better” companies than those with concentrated ownership.

The key regulatory objective should be to ensure maximum transparency in UK listed companies. It is for investors to decide if they want to invest in a firm with concentrated or widely-held ownership.

Dr Roger Barker is head of corporate governance at the Institute of Directors.