News of Snap Inc’s pending IPO arrived too late for our usual weekly round-up, but no matter, now that the full implications of the disappearing photo-apps disappearing votes have started to sink in, we can take a moment to reflect on what this really means for investors and good governance.
First, a quick update on the immediate investor reaction to the plans. Members of the US-based Council of Institutional Investors (CII) and other international investors have written to Snap, objecting to the no-vote IPO. The letter, from Kenneth Bertsch CII executive director has been co-signed by 18 institutional investors and requests a meeting with the company and its advisers to discuss their concerns about performance, accountability and dilution.
The arguments in favour of one share one vote are well-rehearsed and amply discussed elsewhere, so instead, let’s consider the argument that: at the bottom of the Snap IPO lurk the murky problem(s) of US governance more generally and the resurgence of crony capitalism.
To do that it’s worth considering that, in contrast to the US, over the past 30 years, the UK has, for the most part, managed to:
- eliminate multi-class shares
- maintain strong (binding) shareholder protections through company law
- develop respected governance and stewardship codes
- promote high quality, material reporting standards
- protect shareholders from undue and unfair dilution
- manage without mandatory voting
These outcomes aren’t necessarily perfect in the eyes of all stakeholders in the system, nothing ever is. These changes didn’t happen overnight either, nor were they necessarily straightforward or un-contentious. But what has made them possible, we would contend, are the strong institutions of governance in the UK. Not “institutional investors”, although they are a substantial part of the landscape, but the mixture of organisations, regulatory bodies, commercial specialists, academics and professional bodies who have worked together, in a non-litigious, co-operative (albeit argumentative) and (generally) public way to experiment, find a way forward, and if it doesn’t work, go back to the drawing board.
It is worth comparing and contrasting the key institutions of governance in the UK and US experience. From the (very quick) analysis (see table below) you can see substantial difference between the control and influencing mechanisms. Where the UK has a high orientation towards protecting share ownership and issuer relations generally co-operative; the US has high protections for trading markets and the issuer lobby is generally hostile towards governance.
Although Snap Inc will IPO via the NYSE, the lobbying and rhetoric of NASDAQ against good governance standards cannot be overlooked. Wherever there is commentary in the US about proxy advisors, shareholder rights, shareholder resolutions and engagement, there is more often than not a link to NASDAQ and the Chamber of Commerce, and usually they recommend the suppression of shareholder voice.
For the best part of a decade, there has been a concerted effort to raise fear, uncertainty and doubt in the minds of the issuer community about a range of governance norms which the UK takes for granted. It will come as no surprise to regular readers that the so-called Financial CHOICE Act which seeks to chill proxy analysts was created by these very same lobbies. Sadly, many august academic institutions in the US have been caught up in the storm and churned out papers sponsored by the naysayers intent on proving their perspective. And while one swallow doesn’t make a summer, it is notable that it is the firms with the dominant and charismatic owner/shareholder (e.g. SportsDirect?) where governance and confidence have taken a battering.
Strong shareholders working collectively have been able to largely fend off the worst predations of financialism and intermediation. They have changed rules on free floats and more recently have started to demonstrate a willingness to change benchmark providers. Although the stickiness of supplier relationships is something that the Financial Conduct Authority is currently reviewing as part of its Asset Management Study.
Efficient markets only work when all the participants play their part. Stock exchanges would be much less inclined to accept low quality IPOs if shareholders were more minded to #grabyourwallet and boycott blatantly unfair and dangerous offerings such as Snap. The same applies to indices and benchmark operators, nearly all of whom now subscribe either to the Sustainable Stock Exchanges Initiative or are promoting ESG indices.
However, given the difficulty the US institutions seem to have on agreeing a single, mutually-owned governance code, it remains to be seen if investors will be able to stop the rot. As with indices/proxy advisors/sell-side research objectivity so goes the no vote IPO; case-studies in the bystander effect.
| The bystander effect, or bystander apathy, is a social psychological phenomenon that refers to cases in which individuals do not offer any means of help to a victim when other people are present. The probability of help is inversely related to the number of bystanders. In other words, the greater the number of bystanders, the less likely it is that any one of them will help. Several variables help to explain why the bystander effect occurs. These variables include: |
Without doubt, the stranglehold of the sell-side research model has contributed to the stickiness/bystander problem. For decades, conflicts of interest and the fire hose of “free research” has dampened the market for independent, objective research, starving the fund management community of evidence-based insight and conditioning them to think that research and data are overheads, rather than an investment in client success.
Naked Capitalism put it very well when they wrote of Snap in 2014:
Pump and Dump: How to Rig the Entire IPO Market with just $20 Million
“the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics….. Along the way, Wall Street extracts fees from all directions. That’s the Wall Street money transfer machine. It smells like a rose when all stocks go up, but when the tide turns…. OK, that won’t ever happen.”
With Silicon Valley VC’s backed up with investments in dire need of an exit into the public markets, we might look back on the dot.com bubble as a mere blip.
Now is not the time to look to regulators to protect your interests. There is a new administration in the US with a whole new agenda and the SEC is without an experienced management team. Some market participants may welcome the volatility as on opportunity for new sources of profits, the question for long-term asset owners will be “at what price?” Is the erosion of already fragile shareholder rights a price worth paying?
| Institution | UK | USA |
| Accounting Standards | Financial Reporting Council
The UK’s independent regulator for corporate reporting and governance, with responsibility for, inter-alia the UK Corporate Governance and Stewardship Codes. |
FASB
Private, non-profit body. Accounting standards only. No governance/stewardship codes |
| Financial Markets Regulator | Financial Conduct Authority:
Independent regulator set up under the Financial Services and Markets Act 2000 to maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system |
Securities and Exchange Commission:
Although a federal government department with a degree of independence, their Commissioners are, however, appointed directly by the President, although subject to senate scrutiny. |
| Free-float rules | LSEG: 25%
Managed through the Listing Authority. |
NYSE/NASDAQ: No % requirement
Exchange acts as Listing Authority |
| Governance Codes | One code, collectively owned and managed through the Financial Reporting Council | Multiple, mostly privately owned by vendors such as ISS/Glass Lewis |
| Index Industry | Investors are represented on stakeholder panels (but not transparently so), low switching.
May be commercial or owned by an exchange. Low switching, Code of Conduct |
Investors are represented on stakeholder panels (but not transparently so), low switching.
May be commercial or owned by an exchange. Low switching. Code of Conduct |
| Investor Associations | PLSA (Pension funds)
Investment Association (funds and managers) |
Council of Institutional Investors goverened by asset owners, but asset managers and others can join |
| Joint Chair-CEO | Rare | Common |
| Listing Rules | Independent of Stock Exchange, currently housed within the FCA | Integral to Stock Exchange |
| Main Issuer Lobby | Confederation of British Industry (CBI) | Chamber of Commerce |
| Pre-emption Rights | Strong, company law plus governed by the Pre-emption Group. First published guidelines in 1987. Transparent stakeholder group includes shareholders. | No, weak protections |
| Proxy System | Open access/open standards, clear separation between share registrars and custody/settlement system | Closed, Broadridge/Custodian monopoly. |
| Proxy Advisors | Dominated by single US vendor.
Switching rare |
One vendor controls >75% of the market.
Switching rare |
| Shareholder Resolutions Regime | Company law requirements, open to all relevant owners | Policed via the SEC and so by-passing states laws |
| Shareholder Votes | Nearly all binding | Mostly precatory |
| Stewardship Code | As above | Emerging, multiple, not collectively developed, overlapping. |
| Stock Exchanges | Commercial bodies, not regulators | Commercial bodies AND regulators |
| Voting Rules | Company Law | SEC/Securities Rules |