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For the world’s stock exchanges and listing authorities currently falling over themselves to court Saudi Aramco, the answer appears to be the same, wherever it likes.
In the case of the United Kingdom, the Financial Conduct Authority, in its guise as the UK’s listing authority, has presented a consultation document on changes to the listing rules that would allow sovereign controlled companies such as Saudi Aramco to list here.
The consultation proposes to create an additional category within the Premium Listing regime specifically aimed at sovereign-controlled companies, allowing them to list with weaker governance protections.
Supporters of the rule changes argue that they are necessary for London to attract new business, stay competitive and ensure the listing rules continue to evolve and innovate to meet the needs of companies. London’s international capital markets might otherwise be stymied by strict rules and governance requirements, they argue.
While we are sympathetic to the cause of London and support the case for the UK to stay competitive in a growing global marketplace, we do not think re-writing the rules is the correct way to go about it.
Along with the Institute of Directors and a number of other investors, Royal London Asset Management has previously voiced its opposition to the proposed changes. In our response to the FCA consultation, which closes tomorrow, we have laid out the reasons behind our concerns.
Our opposition stems from our view that financial markets exist, not just as enablers of transactions, but as facilitators of meaningful wealth creation for the benefit of society. It’s important to remember that wealth can be destroyed in capital markets just as easily as it is created.
The regulations which govern these markets should reflect this core function, working in favour of creating wealth and helping to protect against destroying it. A robust governance regime is an important mechanism within this system and we believe that two specific proposals put forward in the consultation fly in the face of this.
Firstly, removing rules on related party transactions, which regulates dealings between the sovereign shareholder and the company, creates a significant risk that company assets could be used for political or policy objectives by the firm’s majority shareholder.
Oversight of these transactions is crucial for any company controlled by a foreign government, particularly because there is heightened risk of corruption or expropriation of assets from the company back to the sovereign state.
Without robust scrutiny, there is a risk that value could be destroyed. While not perfect, related party rules give shareholders some assurances that transactions with the sovereign state are above board. The complex relationship between a publically traded firm and the foreign government who holds the majority of the shares arguably makes related party rules significantly more important, not less, as suggested by the consultation document.
Secondly, we disagree with any proposal to remove the controlling shareholder rules that ensure there is a robust process for electing independent directors. Independent directors serve many vital functions – not least of which is to provide a voice for minority shareholders and ensure an outside perspective is being heard in the boardroom.
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