Capital markets union, sustainability and IPOs

By Florence Bindelle

Europe is a global leader when it comes to opportunities, innovation, job creation and industrial output. To support the objective of growth and creation of jobs which are at the core of the EU agenda, the European Union needs to strengthen the competitiveness of its industry.

This requires taking the single market to a new level and ensuring that its regulatory environment is simplified and proportionate. To deepen the single market further and make it fairer, a successful capital markets union (CMU) is needed to strengthen Europe’s economy.

Corporates need a diversification of financial sources, a performing and well-established capital markets union and a tax framework to ensure that financial markets provide the necessary financing for growth and innovation. EuropeanIssuers has thus welcomed from the beginning the European Commission’s project of creating a CMU to foster the flow of capital throughout Europe.

For the success of the CMU in the coming years, the objectives of the action plan should be reassessed so that the forthcoming proposals deliver practical and measurable outcomes. A more horizontal perspective is key for solidifying Europe’s financial system. It is of the utmost importance to design policy measures that integrate resilience and appropriate supervision without undermining innovation, competitiveness and jobs.

For the success of the CMU in the coming years, the objectives of the action plan should be reassessed so that the forthcoming proposals deliver practical and measurable outcomes.

Sustainability

A promise from Ursula von der Leyen, the newly appointed president of the European Commission, of a sustainable europe investment plan is expected to unlock a trillion euros of climate investment over the next ten years. She has pledged to tap into private investment even though the overall strategy to achieve this goal has not yet been disclosed.

EuropeanIssuers believes that corporates have a leading role to play in the sustainability transition as the drivers of the change. Corporates take interest in wider social issues, rather than just those that only impact profit margins. They are aware of the impact of their activities on society and the environment. Their business approach includes corporate social responsibility which can be seen in many countries’ corporate governance codes.

These require companies to promote long-term value creation and incorporate ESG (environment, social and governance) factors in their strategies and reporting. It is important to foster the role these codes play in promoting corporate sustainability by ensuring that they are not undermined by unnecessary legislation. This increases the number of sustainable projects and creates new market opportunities for investors.

Corporates take interest in wider social issues, rather than just those that only impact profit margins.

As businesses become more global, their operational processes become more complex. To capture this evolution, authorities tend to develop policies which shift more responsibilities from states to corporates. Those policies impose disproportionate obligations to achieve policy objectives that are neither the primary purpose nor the remit of companies.

It is important to note that companies are committed to creating long-term, sustainable value, but they should not serve as a substitute for state authorities and their responsibility to citizens and the environment in the absence of a political solution at the EU and International level. The upcoming commission should understand that this may consequently harm the competitiveness of European companies on international markets and in turn affect public wealth.

IPOs

Over the past four years, stock exchanges have reported a significant decrease in the number of IPOs being issued as well as a decrease in the number of companies that are publicly listed.
Policymakers should be looking for ways to balance the EU regulatory framework to strike a better balance between entrepreneurial freedom, investor protection and financial stability so that capital markets can be effectively used for the financing and risk management of European companies.

It is encouraging to see that the commission’s new president supports the creation of a private-public fund specialising in IPOs of SMEs. For this to play a part in revitalising capital markets, it must be matched by legislative initiatives which incentivise investment in equity and create a tax framework for savings and capital gains.

Policymakers should be looking for ways to balance the EU regulatory framework to strike a better balance between entrepreneurial freedom, investor protection and financial stability so that capital markets can be effectively used for the financing and risk management of European companies.

Furthermore, existing listing requirements and cost, in both regulated and multilateral trading venues, continue to be disproportionate to the size and level of sophistication of SMEs. EuropeanIssuers therefore believes that a more proportionate regulatory approach should be adopted by the EU as a key principle to support the listing of smaller companies.

Another key issue to be addressed is the development of a harmonised and simplified EU tax system. Ursula von der Leyen rightly points out in her agenda that differences in tax rules can be an obstacle to the deeper integration of the single market and hamper growth. Therefore, EuropeanIssuers proposes a harmonised EU tax system designed to create more certainty and less burden for companies.

As we enter a new phase, EU policymakers should devise a future-proof work programme that sufficiently tackles complex issues and allows for corporates to grow, invest and create jobs. This can be achieved through the strengthening of the Commission’s Better Regulation approach to pursue simpler, more coherent EU regulation which will create a vibrant ecosystem where companies of all sizes can easily raise capital through public markets and deliver growth over the long term.

Florence Bindelle is secretary general and Frederico de Santos Martins is policy adviser at EuropeanIssuers.

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Debate over ‘shareholder’ or ‘stakeholder’ primacy goes global

By Gavin Hinks

It takes a Nobel prize-winning economist to make the obvious comment. Writing on the US Business Roundtable’s decision to switch from backing “shareholder” primacy to a “stakeholder” model as its guiding mantra, Joseph Stiglitz writes it has caused “quite a stir”.

And indeed, it has. Since the Roundtable made its announcement last week, reversing a core tenet of US business values that placed profits and share price above all other objectives, an untold number of words has been written in commentary around the world as observers came to terms with what it might mean.

Some veered toward proclaiming the end of days, or at least the end of capitalism, as we know it. Others offered a wordy “about time” kind of view. Some have described it as a cynical effort to curry favour with Democrat presidential candidates who have made the reform of US corporate governance a central plank of their campaign policies. Others see in the change of heart a profound observation about what motivates executives.

“There must be a level playing field, ensuring that firms with a conscience aren’t undermined by those that don’t.”—Joseph Stiglitz

Led by Jamie Dimon, chair and chief executive of JPMorgan Chase, the Roundtable said in an open letter: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

In his own comments, Dimon implied this latest step would help repair the American dream, which he described as “alive, but fraying”.

Stiglitz points out that he has been writing about the problems with “shareholder primacy” since the late 1970s, quite rightly bringing attention to the fact that this is a debate that has been around for decades.

Writing for Project Syndicate, he argues the real implication of the Roundtable’s decision is that corporate America needs regulation to ensure all companies are operating in the same way because, while some may choose a “stakeholder” path, others would not as part of their own efforts to win competitive advantage.

“But while many CEOs may want to do the right thing (or have family and friends who do), they know they have competitors who don’t,” Stiglitz writes.

“There must be a level playing field, ensuring that firms with a conscience aren’t undermined by those that don’t. That’s why many corporations want regulations against bribery, as well as rules protecting the environment and workplace health and safety.”

Stiglitz then observes that Dimon is part of an industry—banking—that has lobbied against regulation contained in 2011’s Dodd-Frank Act, legislation designed to help avoid another financial crisis.

Dimon is targeted again in another commentary. In Katharina Pistor’s observations she notes Dimon is both chair and CEO of JPMorgan Chase, a position in direct contravention of US corporate governance principles which advises against the same leader occupying both posts.

But Pistor’s commentary runs deeper. She is concerned the Roundtable has moved to embrace “stakeholders” because they see a greater threat to themselves and their ability to hold on to their positions: shareholders.

“Share-price primacy has not only ceased to protect CEOs in the way it once did; it has become a threat.”—Katharina Pistor

Shareholding, Pistor writes, is now formed into blocs with institutions beginning to wield great power. This is far from the days when shareholdings were highly “dispersed”, which allowed executive to make a “mockery’ of shareholder control. Shareholder primacy, she writes, never meant “shareholder democracy”, instead it provided cover for executives to do what they pleased.

Business Roundtable chair and JP Morgan CEO Jamie Dimon at the Fortune Global Forum. Image by Fortune Live Media, licensed under CC BY-NC-ND 2.0

“Why, then, would CEOs come out against a status quo that has allowed them to reign almost unchallenged, in favor of a stakeholder-governance model that puts employees and the environment on an equal footing with shareholders?” asks Pistor.

“The answer is that revolutions often devour their children. Share-price primacy has not only ceased to protect CEOs in the way it once did; it has become a threat.

“After all, it is one thing to champion shareholders when they are too dispersed to organize themselves. It is quite a different matter when shareholders have assembled into blocs with effective veto power and the ability to coordinate in pursuit of common goals.”

Others offered a welcome and a warning. Writing in the Financial Times, Sarah Kaplan, a professor at the University of Toronto’s Rotman School of Management, said the Roundtable’s move demonstrated a “will” to address the “conflicting interests of various stakeholders”.

“But ensuring that this is note mere window dressing will take skill,” she notes and points out that solutions are not easy and that “trade-offs” uncovered in business models as they manage diverse stakeholders should be used as “opportunities for innovation and rethinking” the way business is done.

In the same feature Geoffrey Owen, head of industrial policy at the Policy Exchange, a think tank, argues that the argument over shareholder or stakeholder primacy is based on a error in the way business is understood.

“When businesses concern themselves directly and predominantly with profits, they are not showing excessive regard for owners as distinct from stakeholders. Nor are they slighting other worthy objectives or allowing greed to govern its actions. Prioritising profits means focusing on the most obvious value to society.

“The idea that a company’s main contribution to society comes from other aspects of its activities not directly related to profitability derives from a fundamental misunderstanding of what business does.”

Theo Vermaelen, professor of finance at INSEAD, goes further calling the stakeholder model a “practically useless concept” because it fails to offer guidance to managers on how to make decisions. He says it does nothing to answer how to manage trade-offs between different stakeholders and their interests.

“The [Business Rountable] statement lacks clarity about how corporations can juggle the needs of all these stakeholders and what happens if shareholders decide to take their much-needed cash elsewhere,” writes Vermaelen.

“The always-superior, Western corporate mechanism theory is now more inclined to the China approach. The turning point for mutual studying between Eastern and Western corporate systems is approaching.”—Cao Heping

Lastly, perhaps one of the most interesting comments comes from Cao Heping, a professor in the School of Economics at Peking University. Heping suggests the Roundtable’s statement brings western capitalism closer to Chinese companies and their capital structures, for example Huawei, with its employee shareholder programmes, which he calls a “partnership model”.

This, he suggests, highlights global competition and how it might play out.

“If joint-stock listed companies don’t do anything to change their governance methods, they may lose to the challenges posed by such partnership companies.

“It seems that China has a comparative advantage to pass on and develop such a partnership model, given its historical emphasis on public goods.

“The always-superior, Western corporate mechanism theory is now more inclined to the China approach. The turning point for mutual studying between Eastern and Western corporate systems is approaching.”

Joseph Stiglitz comments that it is too early to know the true implications of the Roundtable’s statement. We can only wait and see.

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Consumers warned as controversial short-term lender Cigno changes name to MyFi

By Peter McCutcheon

Consumer groups are warning borrowers that two related short-term money-lending companies that have charged fees of up to almost 1,000 per cent of the initial loan, and are being investigated by ASIC, are now operating under a new name.

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Shareholders ‘should confront failing chairs’ to fight private equity deals

By Gavin Hinks

activism, activist, investors

Institutional shareholders have been called upon to replace failing chairs as part of an effort to counter companies being sold “too cheaply” to private equity investors.

According to David Cumming, chief investment officer for equities at Aviva Investors, institutional shareholders should be working harder to hold company leadership teams to account. He includes chairs, chief executives and finance chiefs in his commentary, arguing recent private equity (PE) activity can be viewed as a response to mismanagement of strategy.

Writing in The Sunday Times, Cumming called on boards and shareholders to fight acquisition efforts.

“If a bid materialises, particularly from PE, the board and shareholders must be fighters, not quitters. Boards should look first to resolve internally the valuation issues that have been highlighted by the bid, engaging with their long-term shareholders as part of the process.”

Cumming argues this approach has been lacking in recent times and sales to private equity taking place cheaply. He lists the sale of Cobham, Merlin Entertainments, RPC Packaging and Greene King, the brewery, as examples of companies that were sold at low prices.

Private equity activity has been growing in recent times. Figures from trade association Invest Europe show there is €688bn under management by PE houses.

Fundraising has been steadily growing since 2009, the year after the financial crisis when it plummeted to €21bn from a peak of €112bn in 2006. Last year saw fundraising rise to €97.3bn, up marginally from the previous year’s €96.6bn. Fundraising for buyouts fell 8% to €66.5bn.

Total investments in 2018 stood at €80bn, up on €77bn 12 months before.

Almost a third (31%) of the capital comes from pension funds, though there is continuing debate around the potential for allowing retail investors to plough their capital into PE houses.

Surveying the market, Cumming expects more low bids unless assets are more highly valued and “boards defend themselves”.

“The evidence of recent bids shows a lot still has to be done to avoid British companies being sold too cheaply. Management and shareholder behaviour has to change to limit the risk of a bid, and boards must respond effectively to maximise shareholder value if one emerges.

“Investors and boards must be more proactive in instigating management change where necessary, and be aware that these bids may be signalling excessive negativity around UK-based companies.”

‘Legalised looting’

In the US private equity has recently become highly politicised. Elizabeth Warren, a democratic hopeful for the 2020 presidential elections, filed proposed legislation—dubbed the Stop Wall Street Looting Act—aimed at overhauling the private equity industry.

Principal among its aims is to make PE firms responsible for the debt held in portfolio companies. The core acquisition approach used is the leveraged buyout, in which a PE firm borrows to acquire a company using its assets and cash flow as collateral to service the loan.

Warren described PE firms as “vampires—bleeding the company dry and walking away enriched even as the company succumbs”.

Warren is also concerned that private equity is more focused on cutting costs and asset-stripping companies to make them more efficient, than investing and building them up.

In a blog post she writes: “Let’s call this what it is: legalized looting—looting that makes a handful of Wall Street managers very rich while costing thousands of people their jobs, putting valuable companies out of business, and hurting communities across the country.”

Cumming is a long way from this level of attack on private equity. But his call represents a belief that private equity prices in some cases fail to reflect the value of their target companies. Whether other institutional investors will rally to his cause remains to be seen.

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