In an open letter to the business secretary Kemi Badenoch, Archie Norman (the Chairman of Marks & Spencer Plc) has claimed that UK listed companies are losing sight of retail investors. He and the co-authors of his letter, each of whom represent significant market lobbies, have argued that the rules governing the ways that UK listed companies communicate with shareholders and the restrictions on holding virtual shareholder meetings are out date, unfit for the digital age and are actively dis-engaging non institutional shareholders from the companies they are invested in.
In this article, we will discuss: (1) what the rules currently are for listed companies communicating with shareholders, (2) the proposed changes and (3) whether adopting these changes make the UK a more attractive global listing venue.
What is the current law?
Most retail shareholders do not hold shares in listed companies directly. They hold through nominees, often owned or controlled by banks or stock-brokers. Under the Companies Act, there is no obligation for listed companies to identify and communicate directly with underlying shareholders. Communication is only required to be made to the "shareholder of record" (i.e., the nominee platform) who may pass the information on, but there is no direct conduit between the company and their retail investors.
Communications from companies are generally written, rather than digital. A shareholder must 'opt in' to electronic communications, with no requirement to provide an email address, limiting most company communication to the five-day turnaround of print and postage. This has a high cost for the listed company (M&S estimate their shareholding mailings cost approximately £100,000 each) and it does not meet sustainability goals either.
Under current legislation, a digital AGM does not constitute a legitimate meeting, unless a company amends its articles of associate to permit holding hybrid meetings. Some provisions allowing digital meetings were brought in during the COVID-19 pandemic but these provisions have now lapsed. It is not possible to hold a fully digital shareholder meeting; there still must be a formal "place" of meeting where quorum is present.
What are the proposed reforms?
Mr Norman has proposed the following amendments be made to the new UK companies act which is currently under consideration:
- Increased two-way dialogue between companies and shareholders
- A standardised technology solution across the sector
- Digital communications as default
- Removal of requirement of hard copies
- Recognition of digital AGMs
In essence, the proposed reforms are an attempt to bring digital transformation to equity markets with the aim of making them more reflective of the views of smaller shareholders.
It is hard to argue against the position that modern digital communication technologies should be permitted to allow (or even require) companies to communicate with their real underlying shareholders. The UK markets have long favoured institutional investors rather than retail investors and whilst this has sometimes been a strength, the creation of a level playing field between investors, through the dis-intermediation brought about by new technologies, should be encouraged.
We are not convinced however that this will result in the stemming of the flow of listed companies out of the London markets. After all, most shares in Nasdaq/NYSE listed stock are held in "street name" i.e., through a broker and the advantages of a US listing are not so much the transparency of communication but rather the larger valuations which come with the deeper pool of investors in the US. That said, as one of Mr Noman's company's rivals once said, "Every Little Helps" and the more that can be done to bring UK markets into the digital age, the better.