By Lindsey Stewart, director of stewardship research and policy for Morningstar Sustainalytics
The 2024 Paris Olympics are over and Team GB is no doubt proud of its haul of 65 medals – more than any country besides China and the United States. However, with 14 of those 65 medals being gold, Great Britain may well feel like it took the runner-up prizes a few more times than it would have liked.
Unfortunately, there are parallels here with the British capital markets, currently lamenting a dearth of new and exciting IPOs – a field in which we’re also trailing the United States.
It is widely agreed that radical changes are needed. That’s just what is happening, and yet still, not everyone is excited.
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Last month, new proposals to amend rules governing disclosures and investor access to capital raisings were announced as part of the Government’s ongoing plans to rehydrate the country’s capital markets. The key proposal, if enacted, would eliminate the need for companies to issue a new prospectus in most circumstances other than for initial listings on public markets. The proposals also outline measures to increase retail participation in both public and private market investments.
These proposals are intended to complement the recently introduced UK Listing Rules, which came into effect this week. The rules aim to remove the barriers on the road to UK investment recovery by relaxing restrictions on dual class share structures—which allow managers and founders to exercise control over companies in which they may only hold a minority stake. They also remove requirements to seek shareholder approval for a number of significant corporate transactions, or those with related parties.
Pedalling ahead
Although measures to encourage a broader base of investment are a largely welcome boost to UK companies in need of an edge, several of these moves are perceived to come at the expense of investor protections valued by UK shareholders.
On balance, this proposed regulation looks like a bold gamble, which hinges on the idea that the UK can build a more competitive capital market by streamlining the requirements for listed companies, even if that means introducing features their investors largely dislike.
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Pushing forward market features that many of the largest investors oppose will require a careful eye on the detail if we are to attain the leading capital market everyone seeks.
Whether reducing investor protections and required disclosures is the right route to go down will depend on the UK’s ability to attract high-performing and well-governed companies. Any perception that the new rules represent a race to the bottom – in which investors place their capital in lower quality businesses, subject to weaker transparency and greater management control – will need to be fought against.
Overall, while not everyone is happy with the changes, investors and companies appear to have accepted that the current regulatory direction of travel is not about to alter, having just been confirmed as one of the first acts of the new Labour Government.
So, the strategy has been set and the big call has been made. Let’s hope that when the figurative tyres are changed, it turns out to be a stroke of genius which puts UK companies on a winning streak rather than setting up investors for a fall.
