If you're a retail investor, you may feel relatively powerless to change the companies you invest in. Even being a "minority shareholder" implies a level of insignificance. Yes, you may get an AGM to attend, and you may get to pitch a question to the board. ESG has certainly heightened companies' sensitivities to investor action, but whether you feel more engaged is a different question.
Your level of engagement may stretch to checking the share price now and again and noticing a dividend payment has hit your bank account. You may even receive a printed annual report, skim it and stick it in the recycling bin. But life is a busy affair. You may not even be aware of what companies are doing until a big takeover happens, or the boss quits.
Ultimately, if you don't like a company you can sell it and buy a different one. Hopefully you will do so having at least made some money.
Against this backdrop the Financial Conduct Authority's (FCA) proposed listing regime changes may seem rather abstract to you; those keen on detail can read its 411-page consultation in full here.
The proposals strike to the very heart of UK corporate governance as it stands in 2024. The changes may seem superficialy subtle but you could argue they matter an awful lot to how the UK stock market is perceived. They will certainly change how you interact with your holdings. Here are the key issues.
How Will Shareholder Voting Change?
As an investor you want to be informed about key issues and vote on them in a democratic fashion. At the moment a company undertaking a "significant transaction" needs to put it to a mandatory vote. Under the FCA's proposals you will lose some of these voting rights, but will be told about them instead.
Significant events like reverse takeovers or delisting will still be put to the vote and anything involving "a fundamental change in business" – such as share buybacks and non-pre-emptive discounted share issues – will require shareholder approval.
The FCA hopes this new regime will put "put sufficient information in the hands of investors, so they can influence company behaviour and decide how they want to invest". But the idea has already been publicly criticised by platforms such as Hargreaves Lansdown alongside industry body The Investment Association (IA).
Again, to some shareholders this will feel like a loss of power; but it will have less impact on others who aren't accustomed to voting.
How Will UK Listing Rules Change?
At the moment there's a hierarchy of listings, with those companies who pay more and fulfil tighter regulatory scrutiny entitled to a higher status than those with a "standard listing".
Instead, the FCA is suggesting the two categories are merged because "our premium listing standards are regarded as overly burdensome and a deterrent for companies listing in the UK". M&A transactions, it's argued, have stalled or not happened at all because of the red tape needed to be cut through to get the deal done for premium listed companies.
"This disadvantage can manifest in the form of UK premium listed companies with ambitions to grow being excluded from competitive sales processes because, unlike their global peers, they are required by our rules to seek prior shareholder approval for competitive transactions," the FCA says.
"This delay and uncertainty is unattractive to vendors."
Arguably, this won't affect retail investors too much, but it could lead to more deals and takeover attempts for UK companies. How much value does M&A activity add to a market?This is the subject of many an academic paper.
And Dual Shares Classes? They're Staying
Dual share classes are common in the US, but are unpopular among those who insist on stricter corporate governance. Still, if European markets want to emulate the US's success, they may have to concede some ground on this issue.
Opposition still exists nevertheless. Having different voting rights risks creating a permanent (and unwelcome) "two-tier structure", says Tom Lee, head of trading proposition at Hargreaves Lansdown. On admission to the stock exchange, firms will still be able to create dual or multiple share classes, which won't be subject to a "sunset clause" that would otherwise end their existence by a certain date and time.
This seems like an abstract issue until the struggling company you own is faced with a takeover that could add a premium to the share price. You might be keen to accept the offer but the founder may disagree on the grounds it undervalues the company. And here you stumble into the tricky territory of "founder influence".
Founder influence is a hazard for investors in young, high-growth companies or those with exciting narratives. The original founder tends to recede as companies mature over time. They may still have shares but don't exercise as much control.
Recent examples of dual share classes include those held by THG (THG) founder and chief executive Matthew Moulding, who gave up his "golden share" following shareholder pressure over governance arrangements. This allowed the company to attain a premium listing, boosting index inclusion and inflows.
(It might be noted THG is still struggling to make any share price headway following a hugely-successful listing in January 2021 that was followed by a precipitous fall from grace just nine months later.)
Amid these potential changes, which are still being consulted on and are likely to come into effect this year, certain elements will stay the same. Annual reports will still have to say whether the company has followed the UK Corporate Governance Code. "Comply or explain" is the mantra here.
Risk and Regulation
The FCA says the changes "should also provide greater opportunities for investors, while still keeping high standards of disclosure so shareholders retain the ability to exercise stewardship and other rights to influence company behaviour."
Ultimately, this a tricky tightrope to walk, which dilutes the concrete on which our investing culture is built while still trying to keep the building's foundations intact. As the regulator itself admits: "this involves some re-balancing of risk as part of ensuring the market overall supports the risk appetite the economy needs". In regulator-speak "rebalancing" could be interpreted as "increasing".
Overall, the message is this: as an investor you may lose some of your rights, but the sacrifice is necessary for creating a better marketplace. With politicians also keen to remake the City, in the coming years we'll see how much of a difference this makes.
