FCA response to Hill Report likely to make scrutiny of & holding CEOs to account harder in the UK
Critics of companies where founders structurally hold great sway tend to highlight dual class shares with differential voting rights as a significant contributory factor underpinning the perceived lack of corporate good governance. It is certainly true that a variety of high-growth and technology companies have conducted IPOs that locks shareholders outside decision-making in their boardrooms.
Indeed, the Council of Institutional Investors found that two-thirds of 2019 dual-class IPOs had no sunset clause. Advocates cited fear of ‘activist investors’ holding visionary leaders to account. Though regular examples of CEO dual class shares enabled over reach are bracing easy to identify, last week saw the Warner Music Group highlighted again the lack of controls the dual-class shares environment bestows upon good corporate governance^. For every dual class early adopter, whether it is Berkshire Hathaway or Google, there are cautionary tales to the benefits of centralised absolute authority bestowed by lack of corporate governance brakes elsewhere at – for example – Deliveroo, WeWork, Uber and Facebook.
Though corporate governance regulations for UK companies are already extremely legally light touch when it comes to the ability of almost any stakeholder to enforce good practice should the board, CEO or Chairman decide to assert their strategic vision (or go rogue), mercifully to date the extremist power grab of dual class shares have yet to feature on the FTSE indices.
However, that all may be about to change by the end of the year warns corporate governance expert Gerry Brown – long-time advocate of the benefit of boardroom executives being held to account by effective independent non-executive directors – as the recently published ‘Primary Market Effectiveness Review’ working paper from the Financial Conduct Authority is likely – with minor caveats – to legally usher dual class voting shares onto prestigious indices such as the FTSE before year end.
Brown notes, “The mood music from the FCA – not least their recent extremely warm welcome for the recommendations of Lord Hill’s ‘UK Listings Review’ – promises to simultaneously dilute the credibility of the FTSE as an indice holding out (in contrast to the NYSE) against hybrid dual class share structures but also, by doing so, to further water down the scanty regulatory framework of corporate governance impacting UK boardrooms to almost homeopathic levels. The job of being an independent thinking non-executive director is already challenging enough and, without doubt, such a decision will make it much harder. Especially over time.”
Brown continues, “Of course, the dual class shares choir pounds out many rousing choruses. This mood music requires various articles of faith – how dual class shares empower tech entrepreneurial savants to strategic vision with elan as well as how it encourages IPOs as it, allegedly, deters activist investors. Altogether less melodic is how these dual class shares disallow judgements based on boring metrics [actual revenues; profits; mitigating negative exogeneous impacts] and contrary opinion of any stripe [whether these are fellow executives, weak regulatory bodies, shareholders, customers or government]. Basically, all the discordant notes and crescendos that can interfere with the superpowers of unfettered ambitious founders and CEOs. Dual class shares don’t cause this imperviousness to criticism or strategic directional change but they certainly protect against the need for course correction or to actively account for well-founded contrary opinion.”