Unloved, undervalued and behind the times — there seems little to recommend the UK stock market. The coronavirus crisis and uncertainty over Brexit have fuelled a sell-off in London-listed stocks in the past 12 months. The heavy weighting of the flagship FTSE 100 index towards the shares of companies hit hard by the pandemic — financial services, energy and travel — has compounded the pain for investors. The index fell more than 14 per cent last year, its biggest decline since 2008, making it the worst performer of the large international stock indices.
The reality is that the London market was in need of an overhaul even before Brexit started to dominate domestic politics. The market’s reputation for gold-standard corporate governance has been tarnished by a succession of scandals, in particular several controversial flotations by miners controlled by foreign tycoons. In addition, UK equity markets have been shrinking faster than other European exchanges. The number of listed companies has fallen by a fifth since 2012.
A review into the UK listings regime, led by the former European commissioner Jonathan Hill, offers an opportunity to reverse these trends. The London market has few significant high-growth technology companies to boast of compared with rivals such as New York. If the government wants to make good on its promise to turn Britain into an attractive place for the next crop of technology and life science start-ups, flexibility will be needed on some of the market’s rules.
One share, one vote, has long been one of the London market’s principles. It is time to recognise there is value in a diversity of corporate forms and that dual-class shares have a role to play. The US, which embraced the practice during the 1980s, has become the destination of choice for technology companies. Facebook remains the standout example. Founders, rightly, want to retain a stake in their business in the early years after going public. There are also benefits to dual-class structures that can help to protect the purpose of a corporation; Europe’s Novo Nordisk is an example of the benefits of long-term stewardship.
It makes sense, therefore, for London to consider dual-class structures for new listings of innovative companies. Allowing dual class shares for premium listings also deserves consideration, even though many big investors will be opposed to such a move. Safeguards such as imposing time limits or restrictions on what the shares can vote on will be vital.
A trickier issue concerns the current requirement that start-ups, often owned by a founder or a small group of investors, sell a minimum of 25 per cent of their company in a listing. Some owners have complained this acts as a discouragement as many are reluctant to sell too much of their business. Lowering the bar makes sense but there still needs to be a significant free float to stop minority investors becoming nothing more than an afterthought.
Above all, policymakers should recognise that regulations need to be capable of flexibility. There are clear downsides from Britain’s departure from the EU, but one advantage is the leeway for regulators to act unilaterally. A revamp of the listing regime, however, will only go so far. The government also needs to foster homegrown start-ups and a general climate where high-tech businesses can thrive. Venture capital seed funding, and the regulatory freedom for big investors to back it, has an important role to play. All of this and more needs to be considered. The London market may be down but with the right reforms it has every chance of bouncing back.