Imagine you’ve successfully founded a company in the UK. You sell your technology-related product globally. You manufacture at home and in China. You have a few hundred employees.
You’d like to take some money out of the company, so you look into listing. Your inclination is to list in the UK.
But you find that if you do this, your valuation upon IPO will be around 30 percent lower than if you list in the US. You will also be expected to take a significantly lower salary as CEO than you would if you went to the US. And you will not be allowed to issue shares giving you more voting rights than new shareholders — despite the fact that the company’s success stems from you having made consistently good decisions since your initial brilliant idea.
Skimming through the regulations you’ll have to adhere to if your firm is listed in the UK is frying your brain (and that’s before you get to those around diversity and climate), as are your conversations with other CEOs about their trying interactions with big UK investors’ stewardship teams. Oh, and those same investors would like you to know that after nine years, they will probably demand that you stand down from your own board.
The UK has been in the habit of constantly issuing new codes for companies to comply with; the Financial Reporting Council’s “ guidance” to boards alone extends to some 40 pages. There is almost nothing a quoted company can do without checking some kind of compliance along the way.
What are you going to do? You are going to list in the US.
And here we are. The number of companies listed in the UK has fallen 17 percent since 2015, and, says Nikhil Rathi, chief executive of the Financial Conduct Authority, by 40 percent since 2008. There have been just six new listings on the UK market this year (compared with more than 50 in the US and some serious action in China), while building-materials group CRH Plc’s plan to shift to a New York listing from London was a pretty public example of a CEO — with the support of valuation-driven shareholders — voting with their feet.
This is all horrible news for the UK market. Shareholder capitalism is a vital part of wealth creation and of democratic capitalism. But for it to work, we need deep and popular capital markets with lots of listed companies, both old (for the income) and new (for the growth).
The good news is that the FCA is beginning to get it. Perhaps, they say, the listing regime in the UK is “too complicated and onerous.” And perhaps it should be “more effective, easier to understand and more competitive.” Perhaps. A consultation on the matter is now on the go — with some nice ideas in the mix.
Of course, there will be complaints about all the ideas proposed. The scrapping of the current distinction between premium and standard listings (the former came with more disclosure) will irritate the stewardship teams. The end of the rule requiring a three-year track record before listing might bring riskier companies to the market. Founder-favored shares aren’t perfect. Critics will argue that shareholder democracy demands all shares be equal.
I wonder. If a founder can’t quite bring themselves to hand over something they created to the vagaries of the stock market all in one go, why should we not humor them, particularly if it means the rest of us get access to a sliver of the growth they have created along the way? This is the key: All these reforms, if enacted, will (as the FCA says) shift some risk back to shareholders. Some will hate that. But risk should be embedded in markets. It is the price of growth.
None of the FCA’s ideas goes quite far enough. We need to reverse the regulation that stops UK pension funds from investing in the equity markets in scale — pension funds need to take risk too. We need to actively incentivise companies to list rather than simply not discouraging them. We could perhaps offer some kind of entrepreneur’s tax relief for founders who exit via a listing or maybe a three-year corporate tax break for newly listed companies.
Even more than that, we need to shift our culture. This is harder. There is a long and trying history in the UK of despising business, enterprise and self-made fortunes (scan our history of literature, and you’ll struggle to find a “good” businessman character).
One glimmer of hope here lies in the UK’s auto-enrollment pension system. Most people who work are now holders of equities via their retirement pot. A large-scale education program on how this gives everyone a stake in the corporate world might be a good way to inspire society to value wealth creation — and even want to pay our imaginary CEO enough to make remaining in the UK attractive. (A period of intense lobbying of the big pension fund managers to transfer voting rights from their firms to the individual owner would help too.)
We need to get on with all this. Nurturing enterprise (and those who make fortunes from it) is a necessary condition for any society that wants to take care of those who are not rich. The FCA should press ahead with these reforms. And then sit down to think of a few more.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investment, and host of the Merryn Talks Money podcast. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg