Last September, David Schwimmer, head of the London Stock Exchange Group, responded to growing criticism that the City was losing its status as one of the world’s leading financial centres.
The former Goldman Sachs executive described these fears as “an exaggerated narrative and anything that is seen as a negative commentary on London as a financial center has become a kind of click bait.” “I think that narrative is overblown.”
How Schwimmer must be eating his words today. Or it certainly should be.
In the space of a couple of days, the UK’s two largest companies listed on the FTSE 100, Shell and AstraZeneca, have shown in different ways that, if anything, the “narrative” has been underestimated. Massively.
The first flashing red light came from Shell. In a surprising admission, chief executive Wael Sawan said the oil giant was considering leaving the London market and listing in New York, as one of many options to boost the group’s valuation.
Dark days: Brokers Peel Hunt compared the “relentless” pace of takeover activity to a “feeding frenzy” that could see more than 100 companies exit stock markets in the next four years.
There was nothing ambiguous in his words. In an interview with Bloomberg, he said: “I have a location that clearly seems to be undervalued.” You can see why Sawan is so exasperated. Shell shares are trading at a huge discount – or gap, as he calls it – to New York-listed rivals such as Exxon Mobil and Chevron, which is why he keeps buying back his own shares. (Anyone with money to spare should also invest in Shell.)
The second flashpoint came with the magnitude of the backlash against the pay increase for Pascal Soriot, CEO of AstraZeneca.
Soriot’s raise went ahead, but more than a third of investors voted against the rise to £18m.
By any measure, it’s a generous pay package but, by American standards, it’s low for such a successful corporate leader.
Soriot has not threatened action yet, but there are fears that growing controversy over chief executive pay levels – and a distinctly British aversion to entrepreneurs and corporate success – is driving companies abroad.
In fact, even Schwimmer has considered floating compensation as one of the key causes of the listing problems. If the UK wants to retain talent, he says, we should copy American-style packages. Interestingly, he hopes to double his salary to £13m this year. Talk about talking about your book.
While salary is a factor behind the LSE’s difficulties, it is by no means the most compelling reason why companies like ARM Holdings chose Nasdaq or why Flutter Entertainment crossed the water.
They have been well-rehearsed, but neither the Government nor regulators have done anything radical enough to get to the root of why so many UK-listed companies are fundamentally undervalued.
We know the reasons. Institutional investors lack an appetite for risk (they own only 4 percent of the stock markets, down from 46 percent in 1997) and are encouraged to invest in bonds. Liquidity is low and the cost of capital is high. Dual listing rules have been too strict. Debt is preferred over equity. Stamp duty is also too high. All of this has led to a dearth of IPOs: 16 last year compared to 26 the year before. The Footsie has lagged New York’s S&P 500 in 13 of the last 15 years.
And this is only going to get worse. Brokers Peel Hunt likened the “relentless” pace of takeover activity to a “feeding frenzy” that could see more than 100 companies exit stock markets in the next four years.
Goldman Sachs estimates that £5bn has already been withdrawn from UK dedicated equity funds this year.
If Shell were to move, it is inevitable that companies such as rival BP and commodities giant Glencore would follow.
One of the main attractions of the London market so far has been its international spread of companies and investors.
Instead of justifying his pay rise, Schwimmer should convene an emergency war cabinet in Paternoster Square this weekend with colleagues from the Treasury and the FCA to come up with radical plans to stop the potential exodus. And if not, we should ask ourselves why not.
The best Chancellor Jeremy Hunt has come up with is a British ISA.
It’s nothing bad in itself, but it’s a game while Rome burns.
He has a few months left. For starters, stamp duty on share trading should be removed. Now.