As London loses firms to the US, our obsession over regulations is a distraction
The idea regulations need to be trimmed back is a pure distraction from the real problems that London faces, writes Daniel Valentine
Last week, the government omitted promised audit reform from the King’s Speech, and received a general chorus of disapproval from governance experts and professional bodies in response. On the same day, the Financial Reporting Council announced that it was abandoning the majority of its proposals to reform the corporate governance code, a move which the then City minister, Andrew Griffith MP, immediately labelled as “pragmatic and proportionate”.
Griffith went on to comment: “The UK rightly enjoys a strong reputation for high governance standards but it’s important that we don’t burden our best and brightest companies to the extent that it’s not a level playing field versus our international competitors.”
The government is right to be concerned by the long trend of de-listing which is plaguing the UK. The rise in companies fleeing the London stock market is perceived by many as a threat to London’s status as a leading financial centre, with the London Stock Exchange set to lose as many as thirty £100m-plus firms by the end of 2023. Thirteen firms have announced a takeover so far this year, and some seventeen more takeovers or delistings have been announced and are awaiting completion.
The triggers of this long trend of delisting are complex and contested, but excessive corporate governance simply isn’t a significant part of it. Griffith’s comment suggests that the government harbours a rather old fashioned view about regulation that centrally imposed rules are a “burden” the moment that they rise above the standards of our competitors, and that companies routinely relocate tothe countries with the lightest regulatory standards.
Recent events have proven this view to be quite contrary to reality. It is important to note where these delisted enterprises move to, because that gives us a clue to their reasoning. The most obvious evidence that excessive governance is not the prime cause of delisting is that the number one location companies are relisting in is the USA, which has a much more onerous regulatory regime than the UK, in the form of the Sarbanes–Oxley Act (SOX) of 2002. SOX no doubt has a negative side, in terms of the extra admin it creates, but it counterbalances this by providing investors with much more robust information which is backed up with stiff penalties for negligent directors. Overall, SOX has not diminished the attractiveness of US markets for IPOs, but helped to consolidate American supremacy.
The other problem with the assertion that regulation needs to be trimmed back, is that it is a pure distraction from the real problems that London faces, because the primary reason for the relative attractiveness of the US for listings is high liquidity, not low governance.
The UK market suffers from poor liquidity, and this is most noticeable in the most demanding segment of all: technology. The principal cause of the uphill battle that technology startups face in the UK is investor short termism, risk aversion and an over-focus on the speedy generation of profit. While UK investors demand quick returns and steady dividends, US investors are more open to enduring the years of losses a tech start-up can rack up before it makes a profit. Just calculate how many years it was before Google, Twitter, Facebook or Amazon made a profit. Would those companies have survived on the London stock market? This is doubtful at best.
Additionally, the UK since Brexit has lost much of its reputation as a safe environment for investors. Many investors now regard the UK has having more risk than reward. Brexit was not to blame for this, but Brexit revealed a number of institutional weaknesses, and also seemed to trigger a state of recurrent crisis.
Subsequent to Brexit, the collapse of Carillion in 2018 revealed new weaknesses in the reliability of financial statements and internal controls. 2019 saw two further corporate collapses, tour operator Thomas Cook, and cake chain Patisserie Valerie. Poor reporting of performance was at the centre of each of these failures. It’s now 2023 and investors are still waiting for the identified problems to be resolved. After a five year wait the audit reforms were finally on the verge of being delivered when they were dropped without explanation from the King’s Speech.
The government needs to work urgently to convince weary investors that institutional problems have been fixed and that normal service has been resumed. Demonstrating that the UK is back on a steady path of governance review by delivering the long-promised audit and governance code reforms should be part of this normalisation.
We agree that regulation is a delicate balancing act, but the balance for too long has failed to protect investors, employees, pensioners, taxpayers and suppliers from the costs of excessive risk taking by management. The next Carillion may well be sooner than people expect.