Why I disagree with Ken Olisa on listing rules
ZHEZKAZGAN, Sverdlovsk, Pavlodar. Not names your average investor will have heard of, but all of them are places of operation in Kazakhstan and Russia for an ever-increasing number of companies from overseas that have become members of the prestigious FTSE 100 share index. This seemingly open door to natural resource companies from countries where corporate transparency is not held in high regard is beginning to cause increasing concern, not least because the pensions of millions of people are dependent on the FTSE 100’s performance.
The London Stock Exchange has been eager to attract issuers from developing economies, and investors, equally keen to buy these shares, are placing their money-making ability ahead of concerns regarding how these companies are owned and run. It is vital, therefore, that minority shareholders and ordinary pension holders know how the companies they invest in are governed and who exerts control over them. In the case of the Kazakh mining company ENRC, investors are finding out that the majority shareholders have their own ideas about how to run the company.
Investors should insist on independent boards that take long-term decisions, rather than being pressured by owners holding the majority of the company. This is why the debate over the size of free floats is so timely.
In CityAM’s Forum of 25 October, one of the recently dismissed ENRC non-execs, Ken Olisa, argued that the free float size was irrelevant and that a smaller float allows the minority to drive the share price down if they do not like what they see. But this is not about whether you can punish a share. Rather it is about whether it is sensible in the first place to include such companies in an index that tracker funds then replicate. The greater the risk, the greater the volatility, and the more erratic an index, the less credible it becomes.
Olisa also argued that conformance to the UK governance code, not place of origin, should differentiate companies. Agreed, but such independence and a high regard for good governance must be present when a company lists. The code’s toothless “comply or explain” model is unlikely to resolve such problems post-IPO. Yet the head of the UK Listing Authority (UKLA) recently said that he doesn’t see the UKLA’s role as ensuring best practice. But what is it for if not to do this? The UKLA sets the norms for companies intending to list in London. These issues must be better addressed. The UKLA should assess companies that intend to list more rigorously according to their corporate governance.
The FTSE Group should assess potential 100 companies case by case; those that fall short on governance should be allowed to list but prevented from joining this index, or removed if they are already members. This will become increasingly pertinent as more former Soviet companies turn to London as a place to list. We have to ensure that such companies are truly public and as free as possible from undue influence, with all risk factors fully documented. Insisting on a larger free float and on high standards of corporate governance must be the first steps toward achieving this.
Tom Mayne is a campaigner at Global Witness, working on corruption issues in the countries of the former Soviet Union.