I NOTED with interest Andrew Tusa’s article in City A.M. about UK listing rules [Critics of listing rules in the UK should bear in mind how the system actually works, Tuesday].
While Andrew makes some good points about the role of the United Kingdom Listing Authority (UKLA), I am concerned that he possibly mischaracterised some of the debate in terms of what many institutions are really concerned about. In my discussions with other investors about this issue we are not framing this as a matter of corporate governance per se – nor do we want the UKLA to vet companies for corporate governance – a possible interpretation of Andrew’s comments. We would agree with Andrew that is not consistent with the UKLA’s brief.
However, I do believe that many investors remained concerned about basic minority shareholder protections in the context of companies coming to the London market with strong controlling owners – many of which are from overseas jurisdictions where rule of law is sometimes called into question. This is particularly the case for companies that are given a premium listing – an effective passport to index inclusion and a captive investor market for larger companies. The concern is that the superequivalent standards that investors believe a premium-listed company should represent may be compromised in practice through weak minority rights.
While the 25 per cent free float requirement was indeed established with a view towards ensuring sufficient market liquidity in a stock, this same metric can also serve as a meaningful proxy for investor protection: the larger the free float, the greater the chance that minority shareholders can achieve a critical mass to use their vote in a way to protect their interests. In this context many investors argue that a 50 per cent free float best represents what a premium listing stands for, or at the minimum that 25 per cent should be the minimal standard (as the FTSE index ruled yesterday).
The UK Stewardship Code encourages investors to hold companies to account. But if the minority stake in a company is too small – however large the free float in monetary terms – investors will have insufficient leverage with companies if they do seek to hold companies to account. So many investors believe that a tighter free float metric can and should be used to advance investor protections, and that this ultimately will work to reinforce the reputation and quality of the London financial markets.
George Dallas is director of corporate governance for F&C Investments.