The FT has an editorial this morning in which it argues that the London Stock Exchange needs a revamp, post Brexit.
The argument is insipid, at best, and is mainly a lament to the fact that London has not attracted tech stocks and ends up with mining companies instead. But underneath the existential angst there are suggestions.
These include the suggestion that rules be waived unilaterally to attract the right flotations. In other words, favours should be done.
There is also a strong recommendation that ‘dual listings' be permitted, with two classes of share from one company being allowed, which is a mechanism invariably used to reinforce control by a power elite within a company.
And there is the almost ritual call for state aid for this bastion of free market capitalism, this time to encourage a flow of new market entrants, as if tax relief suddenly makes people entrepreneurial, which it clearly does not. Tax is good, but not in that way.
So, the FT wants to relax the rules, assist the flow of funds upwards in society and seek state assistance to do this. You literally could not make something so harmful to the UK up unless you were the FT.
But what the FT really misses are the big questions. These are really significant. They include why are companies themselves steadily reducing the number of shares they make available in the stock exchange? Is that an attempt to push up their share price by restricting supply?
And why are so many companies paying out dividends in excess of their apparent capacity to do so? Is that motivated by the same concern?
And why is the stock exchange relaxed about the resulting hollowed out firms?
Why in fact is the whole edifice based on the false premise that shareholders own companies, which is not true? They merely own the right to an income from that company if that company, at its sole discretion, agrees to pay it? The shareholders have no claim, except in liquidation (when the claim is usually meaningless), on the actual organisation at all.
So why do we give this shallow activity, that so distorts behaviour, the credibility that we do?
And would we, in that case, be better off at least reviewing these concerns before wondering how to perpetuate the capture of wealth by an elite within companies, which is what the stock exchange already does, and which the FT would wish to make worse?
Like so much else, it seems to me that in its current form the stock exchange is past its use by date, but apparently very few can smell the rot setting in. I think that will change.
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Two separate questions here, I think. (i) what do we want from a stock exchange and (ii) what sort of ownership/management structure do we want for our companies (whether or not they trade on the stock exchange).
(ii) is the “big” question and covers lots of areas you have covered extensively. In a sentence we have large companies with managers in charge looking after their personal interests under the guise of “shareholder value” using excessive amounts of borrowed money….. with little regard for the wider world.
But let me look at (i).
I think the problems for the Stock Exchange is ownership structure. It is a company (quoted on the London Stock Exchange) that serves its owners and managers rather than its users. The view that has prevailed for the last 40 years is that the joint stock company is the only ownership model that makes sense; that competition is good because it delivers innovation and better value for money.
The truth is that competition between Exchanges has delivered “watered down” rules and regulations (that are there to protect a broad group of stakeholders) in pursuit of profit. Furthermore, the fragmentation of where shares trade reduces liquidity and permits the High Frequency Traders to flourish.
I would like to see Exchanges go back to their origins as being mutually owned and run by their users with strong regulatory oversight to ensure that the broader interests of non-users are protected.
As a basis for a reform agenda that is a good one
Even if it undermines the whole logic of the exchange as it now exists
Incidentally, if it was mutually owned with protection to prevent control it then becomes a potential viable regulator
I’m sympathetic, but don’t understand why you are saying the idea that shareholders own the company is false.
Okay you can say shareholders own shares, and have only the rights attaching to those shares, but these are shares in the company – shares in the ownership.
I set up my company, I own all the shares. I can sell them and hence the company, if I want to. I get whatever someone else who wants to own the company is prepared to pay for it. Of course with a listed company no individual shareholder owns the company as a whole, but together they do.
And it is also not true that shareholders only have a right to income (and only then subject to the directors declaring dividends). They have other rights too. They can vote, they can change the constitution, they can remove directors and appoint new ones. It’s not day to day control, but these are still rights.
Am I missing something here?
First of all, the one person company was never meant to exist. When companies were first permitted they had to have at least seven members, and the logic that this was a company, and not an incorporated individual, was embedded in law for a very long time.
Second, the point I’m making is that you do not own the assets of the company: they belong to a legal entity that is entirely separate from you. Of course, if you own all the shares it might appear that you can control the company and decide what to do, but that is not the case. You can decide to sell the shares to another entity, but you cannot as such decide to sell its trade: only the directors can do that. They can require your consent, but it is still their decision, and in your case, where you are the sole director you might confuse these two entitlements, but they are not the same.
As a shareholder you have incredibly limited rights, and none at all the income, again unless the directors consent. And in practice, in any case the rights that you note to be reserved for the shareholders are, in fact, entirely now those of the directors, because the shareholders can never make the propositions that you note.
For all practical purposes, the suggestion I made is entirely reasonable. It also leads to another conclusion. That is that of all the stakeholders in the company the shareholders have least interest in it because they are the only ones who can walk away without consequence and yet they are the only ones to enjoy limited liability. We have got things terribly wrong
Shareholders appoint and can remove the board..the board appoints and can remove the management.. are you suggesting shareholders circumvent the board and management and manage the company themselves.. crazy!
Matt
I have already addressed this issue and please don’t tell me about your fantasies and instead deal with the real world, where even in small companies this does not happen. The members, even there, vote for the directors’ recommendations.
Shall we get real here?
I would like to tell me all the companies you can find where the members voted the directors out this century
Richard
“As a shareholder you have incredibly limited rights, and none at all the income, again unless the directors consent. And in practice, in any case the rights that you note to be reserved for the shareholders are, in fact, entirely now those of the directors, because the shareholders can never make the propositions that you note.”
Rather depends on the Articles of the company doesn’t it?
If we take Companies Act 2006 model Articles,
Article 4 states that – “The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.”
So if the shareholders wanted to direct the directors to sell the assets of the company, they could do so.
Article 17 allows any person willing to stand as director to be appointed by the passing of an ordinary resolution of the members.
Can you point to any company law that says shareholders need the directors’ permission to pass these resolutions?
I can point to s303 Companies Act 2006 under which Directors can be required to call a general meeting of members if required to do so by shareholders holding 5% of votes. s168 allows for the removal of a director by ordinary resolution. s321 gives shareholders holding at least 10% of votes the right to demand a poll on any question put by them. There are lots more powers for shareholders but that suffices to show you are wrong. Ultimately, shareholders can appoint and remove directors. How much more power do they need?
I suspect your understanding of Company Law is limited to misunderstandings and vague thoughts of what you would LIKE company law to be and how if only company law were the way you’d like it to be, it would support your contentions.
I am a chartered accountant of 40 years experience, 20 of them in practice, with a lot of corporate clients
Not once did I see a resolution of those sorts, and I wrote a lot of resolutions in my time, and incorporated a lot of companies.
And nor do I recall a single resolution of such type with regard to a PLC
Nor do I ever, creating deeply activist hedge funds apart, recall shareholders ever getting directors a[pointex over the wishes of the company, and then always a minority
I would describe myself as pretty good at company law, familiar with it and most especially its use. And it is you who is living ion the world of make believe here and I am the realist
Of course you might also be a company lawyer, and they think because something is written it happens, which is quite sad really, and I speak again from long (and sometimes painful) experience
I summarised the real world very well
“I would like to tell me all the companies you can find where the members voted the directors out this century“
Normally change comes before a shareholder vote as pressure is applied by shareholders to force a particular course of action, including change at the board level.. here is one of 100,000s of examples
https://www.businesswire.com/news/home/20200512005495/en/Elliott-Advisors-Sends-Letter-to-Board-of-Directors-of-Alexion
Maybe you are out of touch and not in the real world
That does not make your point at all
And I note you are a troll from your posting behaviour
Please don’t call again – because if I identify you then you will not get on
“I would describe myself as pretty good at company law”
And yet you were unaware of the rights that shareholders have. Claiming that they were “incredibly limited”. And when I am able to quote the actual legislation which shows that shareholders have significant rights you seem be claiming that just because you haven’t personally been involved in a situation when they are exercised, the rights can’t be real. If you have been informing directors and shareholders that shareholders have incredibly limited rights you shouldn’t be involved at all with such situations and I feel sorry for your clients who have been dealing with someone with a woeful lack of understanding of the legal position.
You claim to have formed many companies yet quite clearly haven’t looked at the Articles under which they were formed or the law which governs then as otherwise you would have known that such rights exist. It is BECAUSE such rights exist that that they are not often used. If I am approached by a director who asks “the shareholders want me to do this, can they make me?” and I advise them that, “yes it is possible that they can, you need to sit down with them and work something out” that disputes are resolved. You presumably have been misadvising them that “no they can’t”. That people have been getting such inaccurate advice from someone claiming to be a professional is shocking.
I am well aware of the rights shareholders supposedly have
But these days I work mainly as a political economist, and in that capacity what I have said is an accurate observation of the truth
Much regulation is a fiasco at best, and a deliberate charade at worst.
And the reality is that shareholders do not make the demands you are claiming – except in the most exceptional of circumstances, and then rarely with any chance of success, precisely because they canno0t secure the support that they need – as you will well know
So you are playing a game of misrepresentation and I am describing the political-economic truth
I think we’ll leave it there, largely because I am right on this one, as anyone bar a narrow-minded lawyer will know.
“Am I missing something here?”
Well, I think so, at least for public listed companies. These businesses’ shares are owned by financial institutions. They have no real interest in anything but their own corporate interest. What do they do if called on to consider a decision about the future of the business that may not be that determined by the management?
The point to remember here is that the institutional shareholders do not want to run the company, become involved in policy formation or make that kind of decision. They buy into this ‘ready made’. Institutions will therefore almost invariably back the management, not a disparate and amorphous ‘shareholder’ interest. If institutional shareholders really do not agree with management the spaghetti will already have hit the fan if they are still there long enough to require pick up the pieces, and will hate the predicament. Why? Because if institutions do not like the management performance they have a fast way out – they simply sell the shares.
Agreed
Mutual ownership is a wonderful model; it used to apply not just to building societies, but I recall, in a long Scottish tradition to banks, insurance and pension specialists in the financial sector, typically overseen typically by prudent, cautious, clever, cultured, well paid but not greedy actuaries. The New Town, Edinburgh and St.Vincent Street in Glasgow were lined with their headquarters; until the 1980-1990s: all gone.
All this was simply laid waste by neoliberalism’s grotesque exploitation of base, bottom-feeding, short-term human greed, and many of the best mutuals voted themselves out of existence for the promised, instant jackpot produced by the gold-plated, ‘free market’, joint-stock model everyone is now wringing their hands over, because it is so bereft of shareholder control, long-term wisdom, or any discernable standards or values that are not reducible to cheap public relations platitudes.
Is this a just a polemic? Yes, but I think it speaks to a long ignored, but quite obviously self-inflicted disaster, built solely on the seduction of base, free market short-termism.
But you are right
So much of finance was managed in this way
Thatcher set out to destroy it, and did
Given that the City is losing custom due to Brexit and that EU is apparently recognising US regs under equivalence, I can well see that this request from Stock Exchange is going to be well received by Govt anxious to restore something to the City.
Like a game of chess our nation is being played out to an inevitable conclusion.
I am well out of my depth with stock exchange stuff (the discussion on shorting was near incomprehensible), though I can appreciate that the FT is effectively calling for state aid for the markets.
I’m interested in what you said above, Richard, about companies reducing the number of shares available, and this is probably a stupid question: would one way that they do this be to sell future shares to employees? That is, a saving-type scheme, where theoretical shares are bought, but can’t be redeemed for 3 to 5 years: Where are those shares in the meantime, are they in the stock exchange or not?
(That looks like more than one question, but a no or yes answer can encompass the lot!)
I have to agree with with Clive Parry’s view (bearing in mind I understand little, but do find the information instructive), or at least the outcome, that the supposed competition is not there and doesn’t deliver value for money while the focus is on profit only (without regulation). The idea that, say, private water companies can provide an effective service while answering to stakeholders and focusing on profit does not seem to give value for money – there needs to be (government) investment in infrastructure, not just allowing private companies to do the bare minimum, only dealing with the necessary patchwork fixes. It seems to me that government needs to take into account private company profit – if they want to use them – when providing the budget for public services. At that point, does it make much difference if it is publicly owned (with classic ‘wastage’) or privately owned (where some of the budget goes over to profit), there doesn’t appear to be any efficiency or benefit – in that industry at least – to using private companies. And having to ‘consult stakeholders’ at every turn – each with their own interests – may even be detrimental.
I think there is a case to argue that the stock exchange should be a government institution. If it were then it would make imposition of and collection of a financial transactions tax much easier. This sort of reform would not be effective in isolation from other wider reforms of the financial system but I don’t propose to set out my broader thesis for a reformed system here…its a work in progress with the help of a couple of collaborators who are helping knock it into shape and identify where more thinking is required.
This is possibly a little pedantic, but I think terminology is important:
– I think ‘dual listing’ applies to stocks listed on 2 exchanges e.g. Unilever are (as far as I know) listed in the Netherlands and the UK.
– ‘Dual class’ shares are typically those with different voting rights between A and B shares – this is currently not allowed on the UKSE.
So you understood
“… as if tax relief suddenly makes people entrepreneurial”
I don’t disagree, but would you agree that higher tax rates with good anti-avoidance rules and strong enforcement are more likely to encourage entrepreneurs to invest than lower tax rates, poor anti-avoidance rules and weak enforcement?
Yes
Firstly Clive Parry has raised many of what seem to me to be the relevant issues.
Secondly my suggestion – yes, again! if we want The Stock Exchange to raise capital for business and industry would be to go back to preference shares with a redemption date rather than endlessly recycling a fixed pool of ordinary shares which benefits nobody apart from the stock trading community.