Yes to Aramco. No to Unilever. This is one interpretation of developments over the last year regarding listings on the London market.
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. In the event, the listing was postponed. Despite this, the independent regulator, the FCA, made changes to the listings rules that would increase appeal to sovereigns, and these came into effect this month (July 2018) in a new premium listing category.
Meanwhile, in a separate situation this year, a private company, the FTSE Russell — which overseas index decisions surrounding FTSE listings — 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. While the FTSE Russell is also independent its decision was informed by an opaque advisory group, well away from the glare of publicity.
These situations and decisions were different, but both are important in the context of the competitiveness and international appeal of London as a global financial centre, post Brexit.
The attraction of a transparent process
The process regarding Aramco and the attitude to sovereigns was relatively transparent, helping the final outcome, where feedback from private investors ensured no relaxation of governance standards. This should put London in an attractive position in the future to attract such international listings.
The wider issue that received attention during this process was whether there is a need to overhaul the UK rules for equity and debt markets — to keep London competitive in a changing global climate. This is still an open-ended question, but the reality is that all rules need to evolve and change, reflecting investor needs and economic conditions.
Flexibility in the face of a changing economic climate is important. Privatisation may become more evident in state-controlled firms across the globe — not just in Saudi Arabia, but across Eastern Europe, the central Asian ‘Stans and wider Asia, too. Thus, the proposed rule changes may broaden the appeal of London to this international audience.
While the FCA’s decision could be seen as supportive of London’s global competitive position, it is far from clear that this was the case with the FTSE Russell’s stance.
London needs to retain its global outlook
The vast bulk of future economic growth in coming decades will be from outside of Europe. As a financial centre, London needs to retain a global focus in which it will be a good place to conduct business from, as well as in. So international firms may wish to list in London to attract a global investor base. More firms, too, may change their future corporate structure. Flexibility needs to be shown.
While the situation with Unilever is very different to Aramco, there are common themes. Unilever has been one of a number of dual-listed companies, listed both on London and on another exchange. Earlier this year, Unilever announced plans to consolidate into a single HQ in the Netherlands, allowing it to simplify its corporate structure and providing greater protection against any possible predator. This move away from the UK would not lead to job losses here and would also still allow Unilever to retain a premium listing in London, meaning it will be quoted in the ex-UK series.
But it now seems that Unilever will not be listed on the FTSE 100 anymore. If so, its absence will have consequences for index funds, who will no longer need or 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 it 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. Examples include when TUI and BA announced changes that led to their corporate headquarters moving to the Continent. Both were allowed to still be quoted on the FTSE 100, helping to sustain the capitalisation of the index, not disrupting shareholders and also — indirectly — retaining the global reach of the index. Flexibility could have allowed Unilever to satisfy nationality rules and be listed on the FTSE 100.
Independence is important. In the case of the change to listings for sovereigns and the attitude towards dual-listed firms, the decisions are taken by two distinct groups: an independent regulator and a private provider responsible for listings policy on the London exchanges.
But in the case of the FCA, all is open and transparent, and concerns can be addressed directly. Perhaps this best practice should raise questions about the transparency of the FTSE Russell approach, including the opaqueness of its advisory group membership and how decisions are reached.
As a private sector firm the FTSE Russell, which oversees the major London index, did not face the intense scrutiny faced by the FCA involving examination from Parliamentary committees. These were met with sensible and transparent responses and an engagement exercise with the private sector.
Instead, the FTSE Russell’s Policy Advisory Board is opaque, with little indication of who is on it and what drives their thinking. In this day and age, when openness and transparency are much sought after, that needs to change.
To maintain its competitiveness, London needs to be proactive
Measuring success is difficult. But the depth and breadth of global indices — including the capitalisation of the major equity exchanges — is one such example. Another will be seen in the Z/Yen think-tank’s survey of international competitiveness. This is likely, in my view, to see New York displace London in the half-yearly survey later this year, highlighted by the desire of President Trump to deregulate, enhancing the position of New York.
One of the challenges in ensuring the City of London’s future competitiveness is to ensure that we avoid the group think and status quo bias, which has characterised so much of the Brexit debate regarding the rest of the economy, as vested interests have sought to change little. Flexibility is needed in the face of a changing global climate
London needs to be proactive, and export best practice by attracting listings to London and by retaining those that it has.