Weakening protections around dual class share structures will not deliver the desired benefits
There has been extensive discussion amongst UK policymakers about how to rectify the recent decline in IPOs as the current government looks for ways to boost economic growth and maintain the City of London’s reputation as a global financial centre. One such suggestion is to weaken protections around dual-class share structures (DCSS, or unequal voting rights).
However, new research shows that this could have a detrimental effect for long-term investors and, ultimately, retail and pension savers, as well as being unlikely to deliver the desired benefits.
The proposed equity listing rule changes laid out by the Financial Conduct Authority (FCA) in May 2023 advocated, amongst other things, taking “a more permissive approach to” DCSS – suggesting this would allow “a full range of company models to list in the UK” and appeal to tech firms in particular.
This proposal was unexpected, particularly given the lack of evidence provided demonstrating that a key reason high-growth companies list elsewhere is the UK’s shareholder rights regime. In both Railpen’s response to the FCA, and a just-launched report from the $2.5trn Investor Coalition for Equal Votes (ICEV), co-chaired by Railpen and the Council of Institutional Investors (CII), we have examined whether DCSS do in fact support healthy capital markets.
Based on the evidence in both these reports and elsewhere, we are concerned that currently envisioned reforms could in fact prove damaging to UK capital markets.
The nuances of capital markets
Capital markets are not a one-way street. UK Finance and EY’s 2023 UK Capital Markets research attests to the notion that capital markets operate in a circular fashion. Companies want to access a large and liquid pool of high-quality investor capital, while investors seek access to dynamic companies that can generate long-term sustainable financial returns. It is therefore clear that any reforms proposed need to make UK capital markets attractive to companies and investors alike.
Robust investor protections have helped make the UK the global financial powerhouse it is today
The UK Finance/EY report also found that “ease and cost of being publicly traded” were less important to companies choosing a listing jurisdiction than (in order): access to a strong investor base; valuation and research coverage; liquidity; and the availability of comparable companies.
Governance considerations were not a priority concern for the small, medium and high-growth companies the UK is keen to attract.
This echoes ICEV’s own conversations with IPO advisers, with one adviser noting that governance practices (including DCSS specifically) were “a marginal consideration, if at all” for their clients. It also aligns with our recent analysis of the UK-based companies that have chosen to list in the US since 2017: of the 12 companies that gave reasons for doing so, only one (Endava) cited governance rules. Other companies mentioned liquidity, access to capital and the quality and nature of the investor base.
Include the investor perspective
Not only are DCSS therefore unlikely to encourage UK listings, but they may also undermine important corporate governance and shareholder protections. In ICEV’s report, we found that DCSS do not deliver financial advantages over the long-term, instead conferring unjustified privileges to company insiders and insulating managements and boards from the views of independent investors.
It is hard to see how the FCA’s latest proposals to permit greater use of DCSS will improve the UK’s competitiveness
This can be to the detriment of long-term investors and the functioning of capital markets. Robust shareholder rights (including the right to exercise a meaningful voice through the vote) are central to ensuring shareholders can effectively (and appropriately) influence corporate behaviour on material issues and in support of long-term performance, as the FCA itself noted in 2019.
One-share-one-vote structures allow investors to ensure that companies are run in the interests of their beneficiaries, operate productively and efficiently, and are accountable and transparent. As a result, ICEV is calling for DCSS to be phased out wherever they are in use, not just the UK.
UK policymakers must appreciate the extent to which robust investor protections have helped make the UK the global financial powerhouse it is today. And any attempt to reform UK capital markets must be viewed from both the company and investor perspective. It is hard to see how the FCA’s latest proposals to permit greater use of DCSS will improve the UK’s competitiveness.
If investors become more reluctant to invest in UK-listed firms because our reputation for strong investor protections has been damaged, then companies will look elsewhere for their liquid, high-quality pool of capital. This, in turn, risks creating a vicious UK capital markets cycle that will damage outcomes for investors, companies and beneficiaries alike.
Caroline Escott is chair of ICEV and senior investment manager at Railpen