Engaging on governance more effective than tweaking listings rules

The FCA's proposals to relax UK listings rules could lead to more listings, but to what end?

There has been much debate about what would attract promising growth companies to list on UK stock markets rather than elsewhere. The government’s recent decision to pull back from proposed corporate governance reforms reflects divided opinion about what the best approach is.

UK listings have fallen by 40% since 2008, according to the UK Listing Review. Adding to this trend, many companies now choose to stay privately held for longer or have reversed their public status.

Some have argued that loosening the UK’s governance framework would help UK companies to compete with markets like the US. Yet the voice of long-term investors has largely been absent from this discussion.

We share the UK government’s appetite to simplify and streamline existing reporting requirements, but not at the expense of critical disclosures, such as distributable profits or a material fraud statement.

Having a diluted corporate governance framework significantly increases the risk of unsustainable growth, as recent examples of company failures owing to poor management have shown.

Learning lessons from company failures

Silicon Valley Bank (SVB) is one such example. The bank’s lack of a diverse customer base and long-term strategy to manage different economic cycles led to its collapse earlier this year. This was allowed to happen due to failures in corporate governance.

SVB’s senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable – and only one member of their board had a career in investment banking. The resultant panic among investors about the health of the financial sector globally then harmed a wide range of banking stocks.

Looking back further, cases of poor governance at Wirecard, Enron, and Lehman Brothers all had a fatal impact on those companies, damaging economies and societies in their wake.

The dangers of box-ticking

However, it would be fair to say that the way UK corporate governance has been implemented does not always work well. Too frequently, companies in the UK operate within a framework that has become more about managing risk than generating growth.

And, despite the rise in risk management committees, major market-moving corporate governance failures continue to take place. We need to change our perspective. Corporate governance should be an enabler of risk-taking growth, while ensuring risks are proportionate. But to enable growth and innovation, we need strong governance, such as an effective board with strong skills and standards in place.

Assessing good governance is often situation-specific and nuanced. Factors an investor might consider include the size of a company’s board, whether an individual director sits on too many boards, or how often the board meets.

Through meaningful investor engagement, we as investment managers and owners must also explore the behavioural and psychological aspects of good governance. These include board dynamics and culture, how board directors interact with the CEO and the wider workforce, and diversity of thought on the board. Boards should also allocate time to prioritise important but non-urgent matter such as forward-looking strategies and planning.

High-performing companies should be the goal

Ensuring good governance standards are in place through meaningful, business-oriented investor engagement will do more to bring about better performing companies than tweaks to listings rules. The Financial Conduct Authority’s proposals to relax UK listings rules could lead to more listings, but to what end?

Policymakers express concern about business investment flatlining in the UK since the EU referendum, but a stock market listing does not inherently encourage investment. IPOs are often used by founders to cash out rather than raise cash for further investment.

By instead looking to strengthen corporate governance, and crucially, how it is implemented, we can empower boards to take risks that support profitable company growth. That is what ultimately enables firms to create jobs and boost demand for ancillary services within the countries they operate in. The UK has an opportunity to lead the way. We should not waste it.