Murky Waters of Governance
Investors, customers and taxpayers have been left with a number of questions about the privatised water industry this week as Thames Water struggles to keep itself afloat. The main question being asked is: where has the money gone? Thames Water has found itself in financial difficulties with interest payments rising on its £14 billionn debt – some of which is linked to RPI. This debt is equivalent to around 80% of the business, raising further questions about governance at the firm. Many other major water companies also have significant debts, although not quite as large as the company responsible for clean water coming out of the taps across the capital and much of the South East of England.
The water companies claim money raised via these debts has been spent on upgrading infrastructure. Although the slew of recent headlines on sewage spills would suggest significantly more investment might be needed in future. Critics argue companies like Thames Water have made generous dividend payments to the investment firms that own them – which now includes a Canadian pension firm and the pension scheme running the retirement funds of university employees in the UK, as well as international investment groups and sovereign wealth funds. All could take a serious hit if the government does have to step in to rescue Thames Water. It also has impacted sentiment on other listed water companies in the UK, which until now have been seen as a reliable and generous dividend payers. All this could dry up if there is now major shake-up of these privatised utilities.
Revolution? Boohoo Battles the Board
More questions were raised about corporate governance this week, this time in the AIM market, where Revolution Beauty defied investors who had voted out its CEO, chairman and CFO. The attempt to get rid of the senior executives was led by Boohoo – another AIM-listed fashion brand which owns a 27% stake in Revolution Beauty. The situation has caused serious ructions and some mudslinging between the two firms. There is little sign either side is prepared to kiss and make-up, with regulators now looking to step in to help sort out the mess. For investors this highlights the issue of potentially lower corporate governance standards on the junior market, although with plans to change the listing rules on the main market this kind of dispute may become more common. For more insight into the background and ramifications of this issue see our article.
Listing Problems
Given these problems on AIM, not everyone is happy about proposals to changes listing rules on the main London Stock Exchange, in a bid to attract more companies to list in the UK. Major pension schemes, including Nest, Railpen, BT and HSBC, have written to the Financial Conduct Authority saying its proposals could lead to lower corporate governance standards, roll back investor protections and make it harder for them to act as effective stewards of their members’ retirement funds. As a result they claim these proposals risk reducing returns for millions of pension savers. Of particular concern are plans to give company founders more power once the company is listed, through dual voting structures, reducing the right of other shareholders. The question is, will the regulators listen to these pension schemes, or will pressure to attract new IPOs trump these longer-term safety concerns?
RIP to ESG?
BlackRock has stopped using the term ESG, with its CEO Larry Fink saying the phrase has been “entirely weaponised” in the US. However, this doesn’t mean the world’s largest fund manager changing its investment strategy any time soon. Speaking at the Aspen Ideas Festival, Fink said BlackRock remains committed to “purpose” alongside “profits”, adding that the term ESG has been misused by those on the both the left and right of US politics. The question is what phrase might be used instead? To be fair, the terminology although widely used in investment circles, does not register with the average man (or woman) in the street. “Sustainability” might be a better term but could be seen as being too aligned to just environmental concerns and is probably just as likely to draw the same political backlash.
ChatGPT, Where in London Should I Locate?
OpenAI, the developers of ChatGPT, OpenAI, will open their first international office in London. The announcement this week will be seen as a massive boost for the government, which is seeking to make the UK a hub for AI development. In the last 12 months the use of this freely available AI tool, which has been backed by Microsoft, has rocketed, as have headlines predicting ChatGPT’s roll in various doomsday scenarios. The company said its London office will focus on research and engineering. OpenAI, which is based in San Francisco, did not say when the new office would be opening, nor how many it would employ.
Spain Calls
The studio that created Call of Duty will open a HQ in Barcelona, after UK competition authorities blocked Microsoft’s takeover of its parent company, Activision Blizzard. EU authorities have waived the deal though, so Activision is pledging to “meaningfully expand” the studio overseas. Its new office will be in the HQ of Digital Legends, a mobile gaming group also owned by Activision.
HSBC Leaves the Wharf
HSBC is ditching its tower block HQ in Canary Wharf and downsizing to smaller premises. The bank has been in Canary Wharf since 2002 and the 45-story high office held up to 8,000 staff, but many of these desks now stand empty thanks to hybrid working patterns. HSBC is expected to move into BT’s old offices near St Paul’s, offices which are around half the size of its current HQ. The move will no doubt also help HSBC with its stated cost-cutting measures. A moving date is pencilled in for 2026 – plenty of time to pack up all those monitors, pot plants and swivel chairs.
Long Life Pays
Most people wrote annuities off as poor value products, thanks to low rates and waning demand in the wake of Pension Freedoms. But sales have picked up significantly, with higher gilt yields causing a marked uptick in annuity rates. Annuities pay a guaranteed income for life – good news if you live longer than expected as your pension won’t ever run out. At current rates a 65-year-old only has to live another 14.5 years to be effectively making money from their annuity. Of course, these aren’t the only factors to take into consideration. Most annuities pay a level rate of income that isn’t indexed with inflation. And, unless you buy an annuity with a guarantee (which means a lower income) there will be no money to leave heirs if you die before you 80th birthday.
Savings Depleted
The chancellor is the latest to complain that banks are taking too long to pass interest rates on to savers. His comments come after MPs on the influential Treasury Select Committee made similar comments earlier this year. Although there have been several interest rates rises since then, banks still appear to be far quicker at passing on increases to mortgage customers than they are to savers, with those in instant access accounts being particularly badly hit.
Figures from Moneyfacts published this week show the gap between the average two-year fixed-rate mortgage and the average easy access account has widened from 2.19 percentage points in December 2021 (prior to the recent rate rises) to 3.87 percentage points today. Hunt says this issue needs solving quickly, presumably before more people completely empty their savings in a bid to meet everyday living costs. Perhaps the most depressing thing we learned this week was that a record number of people dipped into their savings in May, a reflection of just how hard the cost-of-living squeeze is hitting us. According to the Bank of England there was £4.6 billion more withdrawn from bank and building society account than was being paid in – the highest level since it started collating this data 26 years ago.
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