Unilever is a Test of London’s Flexibility

Yes to Aramco. No to Unilever. This is one interpretation of developments over the last year regarding stock market listings in London.

Last year the UK went out of its way to attract the planned international listing of a small, but lucrative, slice of the Saudi state-controlled oil giant Aramco to London. The independent regulator, the Financial Conduct Authority, made a change to the listing rules that would appeal to sovereign states. This change – a new premium listing category – came into effect this month.

Meanwhile, in a separate situation this year, FTSE Russell, a private company that oversees index decisions surrounding listings on the London Stock Exchange, appears to have decided not to budge in granting Unilever, an iconic British brand, the nationality status that would be necessary for it to remain listed on the FTSE 100. The final decision is likely soon.

While FTSE Russell is independent, its decision was informed by an opaque advisory group, not subject to any accountability or transparency.

The two situations are different, but both are important for the future competitiveness and international appeal of London as a global financial centre. Indeed, if Unilever departs the FTSE 100, the two outcomes would help illuminate two divergent paths for Britain’s future: London playing to its strengths by remaining a magnet for global capital; or opting instead to throw in the towel.

The attraction of a transparent process

The regulatory approach to Aramco and sovereign listings was relatively transparent, which helped with the final outcome. Feedback from private investors endorsed the FCA’s stance of no relaxation in the UK’s strong governance standards. This is good news and puts London in a powerful position to attract international listings in the future.

While the questions raised by Unilever and Aramco are not the same, there are common themes. Unilever has been one of a small number of dual-headed companies, with headquarters and listings in both London and elsewhere. Earlier this year, it announced plans to consolidate into a single Dutch HQ, thus simplifying its corporate structure and allowing greater protection against a possible takeover.

Thankfully, this defensive move did not jeopardise UK jobs, and Unilever can retain a premium listing for its shares in London, albeit as a new member of the ex-UK set of listed companies.

However, it seems FTSE Russell has decided that Unilever will leave the all-important FTSE 100 index. If so, its absence will have consequences for UK facing index funds, who will no longer be able to hold its shares.

Flexibility must be shown, and transparency must be evident

Unilever is not the first to go through this change in its corporate structure and is unlikely to be the last. But in the past, the controllers of the FTSE 100 have demonstrated flexibility in the face of inevitable corporate change. For example, when Tui and BA moved their corporate headquarters to the Continent, both were allowed to remain classified as British and therefore still be part of the FTSE 100. This maintained the capitalisation of the FTSE 100 index without disruptions for shareholders.

A repeat demonstration of flexibility would help London’s capitalisation now, allow Unilever to satisfy nationality rules, and remain a constituent of the FTSE 100.

These decisions – allowing the possibility for Aramco to list in London with a premium sovereign listing and ejecting Unilever from the FTSE 100 – are taken by two distinct groups: respectively an independent regulator and a private provider with responsibility for listings.

The FCA made its decision in an open and transparent manner, and was subject to scrutiny from parliamentary committees and engagement with stakeholders.

In contrast, FTSE Russell’s approach escaped intense scrutiny and left a number of issues unaddressed, including the opaqueness of its advisory group’s membership, what drives its thinking, and how its decisions are reached.

London needs to be proactive in attracting international listings – and was right to show flexibility with Aramco. It would be a senseless, self-inflicted wound if excess rigidity ends up repelling firms like Unilever.

A challenge in ensuring the City’s future competitiveness is to avoid the group think and status quo bias, which has characterised so much of the Brexit debate regarding the economy. We need to be open, transparent, flexible and global in our approach.

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