Capital Markets & Investor Relations

IR Monitor – 8th February 2021

Investor Relations News

This week, we start our monitor by looking at London’s fight to become a post-Brexit IPO global leader. Then, we turn our attention to the lengthy and expensive proxy battles fought by activist hedge funds over board seats, and their often limited impact. Here, we move to discuss the reputation of short sellers in the wake of the Reddit trading frenzy in previous weeks, followed by questioning the EU’s unsustainable approach to stakeholder capitalism. We then take a look at the impact of potential liability demands in light of the UK’s major audit reform. Finally, we turn to the SPAC craze with space as the new frontier.

This week’s news

Hill review: London’s stock market fights to become a post-Brexit global leader

While the London Stock Exchange is a comfortable home for banks, miners and oil companies, it currently lacks the high-growth technology firms that have fuelled the IPO market in New York and Hong Kong. The Telegraph reported that in 2020, IPO volumes by deal value in London came in at just $8bn (£5.6bn), compared with $170bn in the US and $33bn in Hong Kong. To close the gap, Rishi Sunak is looking at possible rule changes in his “Big Bang 2.0” vision for the City and asking Lord Hill, a former EU commissioner, to conduct a review. Potential changes include: dual class share structures (which allow founders to retain a majority of shareholder votes even after reducing their stakes and are popular among tech bosses); accelerated timelines for IPOs (as the UK currently has the longest listing timetable of any developed market in the world); prospectus regulation; and new free float and track record requirements.

Hedge funds fight for spots on corporate boards even though research shows it doesn’t make a difference

Despite the lengthy and expensive proxy battles fought by activist hedge funds over board seats, Institutional Investor has reported that recent research indicates that the impact of these directors is nominal. In a study of 1,874 activist directors serving on public company boards between 1994 and 2017, researchers at Iona College and Sacred Heart University found “scant statistically significant evidence” that directors nominated by activist hedge funds “generate long-term value for shareholders in the form of superior operating performance and outsized monthly returns during their board tenure.” The study included 870 companies that were targeted by activist hedge funds, and focused on directors appointed in consultation with activist investors, as well as those who won board seats through proxy contests. On average, they suggested activist campaigns ending in a proxy vote cost $11 million.

Short sellers are heroes

In the wake of the Reddit-driven trading frenzy last week, Forbes has suggested that the negative view many hold towards short sellers is unfair, contending that short sellers ‘simply keep businesses honest’, and that critics ‘haven’t thought about what life and living standards would be like without the market regulation that short sellers bring to the marketplace.’ This would be a world where defunct companies like Blockbuster still existed; the article argues that not only do these individuals take ‘the biggest of big risks’ short selling, but also points to the way they force businesses to either improve the customer experience, or be replaced by a business that will.

The EU’s unsustainable approach to stakeholder capitalism

The European Commission has recently released a report on sustainable corporate governance, criticising investor-centric short-termism and calling for renewed focus on stakeholders. An article in the Harvard Business Review (HBR) has fiercely opposed these conclusions, arguing that the study cherry-picks a sample of EU listed firms that is not representative of the broader market. The report also criticises the reformulation of directors’ duties to include a broader range of interests, from the “global environment” to “society at large.” HBR suggests that the implementation of such measures would swiftly lead to “corporate paralysis,” allowing almost any board decision to be challenged by virtually any stakeholder claiming a violation of the directors’ duties. Indeed, the proposal would put the entirety of Europe’s business eco-system at risk. Beyond questions of who is right and who is wrong, what certainly transpires from this opinion piece is the stark contrast in views between the Anglo-Saxon world, where shareholder capitalism remains the predominant school of thought, and continental Europe, where calls for a new stakeholder-centric model are steadily growing.

UK directors face new liability demands under major audit reform

The Financial Times has reported that business secretary Kwasi Kwarteng is about to release a white paper containing major reform proposals in the field of auditing and reporting standards. The recommendations, issued by the UK business department, would make directors personally responsible for the accuracy of financial statements, rather than the boards. Directors who do not respect sign-off and risk management practices could face fines or temporary bans. The white paper is expected to reinforce ESG standards for UK listed company as a whole. The Telegraph reports that companies have since lashed out at these plans, claiming it will add an unwanted burden to strained firms and deter qualified candidates from joining boards and questioning whether the changes would place an unreasonable burden on directors and protect auditors from being held accountable. Assuaging some concerns, the publication also notes that the beefed-up watchdog audit will not be launched until 2023.

And finally … outer space may be best place for SPAC craze 

The SPAC trend is about to enter outer space, Breakingviews has reported. Start-up Astra has just announced that it will bring its rocket-manufacturing business to public markets through Holicity, a special purpose acquisition company. Astra’s valuation sits at $2.1 billion, which is still only a fraction of what Morgan Stanley claims will be a $1 trillion sector by 2040. Astra specialises in making rockets used to send satellites into space, with the first launch planned for the end of 2021. Chief Executive Chris Emp, former chief technology officer at NASA, has ambitious plans and intends to raise revenue from a modest $47 million to $1 billion by 2025. SPACs, effectively shell companies with cash that provide a shortcut to a listing, are well suited to companies reliant on investors’ faith in a distant future. While investors have reacted enthusiastically, sending Holicity’s stock up by 57%, the article ends by reminding us SPACs do not guarantee investors won’t be left disappointed.

Conferences

9th – 10th February: Transportation & Logistics Conference – Stifel

9th – 11th February:  42nd Annual Aerospace/ Defence & Industrials Conference – Cowen 

10th – 12th February: Winter Financial Services Symposium – Keefe, Bruyette, Woods

Contact Us

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