IR Monitor – 4 September 2024

In this week’s newsletter:

• The FCA’s new UK listing rules: What do they mean for IROs? Shaking up the regime will be a game changer for London-listed firms, promises IR Magazine
• Business backs away from DEI: companies are returning to their traditional focus on shareholder value, rather than politics, suggests the Wall Street Journal
• London Stock Exchange CEO David Schwimmer argues that corporate bosses must be paid properly. Schwimmer adds that approval of his own pay packet is not necessarily a sign that shareholders are willing to bump executive salaries across the board
• Why have higher interest rates not crushed investment? asks the Financial Times. Academics looking for an answer have scoured corporate earnings calls and investor conferences for mentions of perceived cost of capital as well as hurdle rates
• Investors are finding it difficult to work out if companies are hitting their net-zero targets after almost half of Britain’s biggest listed companies had to restate their climate scores for last year. The Times has the story. 
• And finally …. CEO lashes out at analyst: “Why don’t you do the world a favour and do a little research before you come on an earnings call with absurd questions like this?”

This week’s news

The FCA’s new UK listing rules: What do they actually mean for IROs? 

There has been a significant regulatory shift following the introduction by the Financial Conduct Authority (FCA) of a new system that replaces the old premium and standard listings and simplifies categories and easing transaction rules, reports IR Magazine. The aim is clear: to boost London’s competitiveness as a global hub for IPOs and to make the UK market more attractive to a wider range of companies. While existing firms may not see immediate changes, the relaxed rules on transactions and governance will have a profound impact, especially for UK acquirors who will be relieved from a lot of time-consuming shareholder approvals – a process that has historically disadvantaged UK firms compared to international competitors. IROs must adapt to these changes by updating disclosure processes, enhancing governance communication, and developing strategies to handle the new rules. This includes conducting audits of current procedures, creating new templates for announcements, and engaging more deeply with shareholders to explain governance structures and transaction rationales. Tailored communication strategies will be crucial, particularly for companies making the transition to the new equity share category.

Business backs away from DEI

Corporate America is pulling back from Diversity, Equity, and Inclusion (DEI) initiatives due to increased legal pressure, reports the WSJ. Brown-Forman, known for brands like Jack Daniel’s, is among the companies scaling back on race-based hiring and other DEI policies. The company also announced it would stop participating in the Human Rights Campaign’s Corporate Equality Index, citing shifts in the legal landscape. This move mirrors recent rollbacks across the industry driven by conservative activists like Robby Starbuck, who has targeted what he calls “woke” corporate practices. His campaign has put significant pressure on corporations, leading some to pre-emptively alter their policies to avoid being targeted. His efforts underscore a growing trend where companies are reassessing their DEI strategies, not just due to public pressure but also in anticipation of potential legal challenges. The legal landscape, influenced by the Supreme Court’s 2023 ruling in Students for Fair Admissions v. Harvard, suggests that race-based practices in federally funded programs may violate civil rights laws, a concern that extends to corporate DEI initiatives. The focus for many is now shifting back to neutral hiring practices and the core corporate mission of enhancing shareholder value, steering clear of politically charged initiatives.

LSEG CEO David Schwimmer argues that bosses must be paid properly 

David Schwimmer, CEO of the LSE, has urged the UK to offer globally competitive compensation for City executives if it wants to maintain its status as a leading financial hub, in a recent interview with Financial News. Schwimmer’s comments come amid growing concerns about the City’s competitiveness, highlighted by a slowdown in new listings on the London Stock Exchange. Schwimmer, whose pay package doubled to £13.1m this year, emphasised the importance of shareholder approval in executive compensation. Despite some opposition, a majority of LSEG’s shareholders supported his pay rise, reflecting confidence in the company’s strong performance under his leadership. The debate over executive pay is intensifying, with figures like Dame Julia Hoggett advocating for UK salaries to match those in the US to attract top talent. This push coincides with the UK government’s removal of the cap on bankers’ bonuses, potentially leading to significant pay increases for top performers in the sector.

Why have higher interest rates not crushed investment? The FT asks

The FT has explored the logic underpinning corporate investment decisions, suggesting that their reality might be more nuanced than the traditional economic model suggests. Indeed, this model (i.e. that a lower cost of capital leads to more investments) relies on a vision of executives as rational optimisers, adjusting investment strategies based on changes in the costs of capital. In practice, investments didn’t soar during the low-interest rates of the 2010s nor have they plummeted in recent years as rates have climbed. One factor contributing to this is the relative rigidity of the “hurdle rate” – the benchmark that projects must surpass to be considered viable. A reticence to adjust hurdle rates means that many companies are less likely to cut investments even as monetary policies tighten. In industries with higher market concentration, hurdle rates are “particularly sticky” – a lack of competition allows for a more cautious approach. In sum, it’s not all about interest rates: external economic factors alone are not enough to explain investment decision-making, with market conditions and organisational complexity playing a key role too. 

Almost half of Britain’s biggest listed companies had to restate their climate scores for last year

Analysis from Deloitte has shown that many companies continue to face significant challenges in their climate and sustainability reporting. The Times reports that nearly half of the UK’s FTSE 100 had to restate their climate scores for last year, leading to confusion as to whether companies are on track to reach net-zero targets. Half of these were attributed to changes in data collection and recording practices, whilst nearly a third were necessary to correct errors. With investors becoming shrewder in their scrutiny of ESG reporting, many businesses seem to be struggling to keep up as the vast majority of restatements related to greenhouse gas emissions. Whilst there has been debate around the surge of anti-ESG discourse in recent months, this type of reporting remains relatively new. Deloitte expect these types of restatements to become more common, arguing that corrections may be no bad thing if they demonstrate business’ commitments to improving the accuracy of their reporting. 

And finally… “Why don’t you do the world a favour and do a little research before you come on… with absurd questions like this?”

Corporate earnings calls are rarely heated occasions, but it seems nobody had informed Prospect Capital’s CEO and Founder, John F Barry III, who told a Wells Fargo analyst “you don’t even know what you’re talking about”. The altercation came after Finian O’Shea asked if there were circumstances in which Prospect would force the conversion of some of its preferred stock into common shares. Barry, who said the firm had no reason to contemplate this move, grew increasingly frustrated, asking “Is the house on fire? Why are we talking about something like that?”. He later described the line of questioning as “absurd” and repeatedly quizzed O’Shea on the Company’s financials. Prospect, which runs an $8 billion publicly traded credit fund, has come in for criticism over its use of “payment-in kind” arrangements, where borrowers are able to accrue interest through more debt issuances. Neither Prospect or Wells Fargo has commented on the incident – but it certainly provided a lively end to the summer’s earnings season. 

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