Why PLCs can be a Dragon's Den for many shareholders
The moment an entrepreneur's company gets big enough to get a board of directors their first job should be to sack the entrepreneur," said one luminary of the private equity world.
That might be a bit harsh. There aren't, for example, all that many investors who would have too many complaints about Icap under founder Michael Spencer, notwithstanding his bonus scheme.
But for every Spencer there are plenty of examples where entrepreneurs have brought companies to the public markets and then treated their external shareholders as if they didn't exist.
And there are any number of examples of practices where, even if there is ultimately nothing untoward going on, things don't look right. Knowing who to back is all so much more complicated than it looks on Dragon's Den.
Just this month, Playtech, which provides software for gambling businesses, cancelled a plan to pay founder and controlling shareholder Teddy Sagi €95m (£76m) for three unnamed 'social gaming' businesses. It will instead "enter into a software licence agreement for those assets in the ordinary course of business".
In January, there was a similar controversy surrounding Stobart Group after the logistics company eventually bought a property portfolio from a company owned by its chief executive and another director. Meanwhile, Healthcare Locums is mired in legal battles with its former chief executive Kate Bleasdale and investors over numerous issues, while miner Eurasian Natural Resources Corporation, whose largest shareholders are the founding billionaires Alexander Mashkevich, Alizhan Ibragimov and Patokh Chodiyev, has been rocked by a succession of governance scandals.
The list goes on, and it is no wonder the UK Listing Authority (UKLA) has been consulting on tightening the rules on companies owned by one or more dominant individuals selling minority stakes on the London Stock Exchange.
David Paterson, the head of corporate governance at the National Association of Pension Funds, says a number of its members have submitted a response to the consultation based on "related party transactions" where a company is involved in a deal with directors or other connected parties.
Mr Paterson says shareholders need the full details of any such business and have its relation to the executive concerned clearly spelled out. He also says particular problems have been presented with the overseas natural resources companies, such as ENRC, that have flocked to London in recent years.
They have been attracted by the City's huge number of international investors and the deep pool of capital they have at their disposal to invest.
"There is an issue with a number of foreign companies where very often you have an entrepreneurial structure. There is room for improved disclosure. This is something our members have been talking to UK Listing Authority about," says Mr Paterson.
Of course, one of London's great attractions as a venue for business is the flexibility of its governance standards. Shareholders can either comply with the Combined Code on Corporate Governance or supply shareholders with an explanation as to why they don't.
But Michael McKersie, the head of capital markets, at the Association of British Insurers, says this can fall down when you have a single dominant shareholder. He says: "We have a particular concern around where companies are coming to the market with a high level of ownership by a manager and not fully making the transition to UK PLC expectations."
With long-time listed companies, no shareholder is allowed to build up a stake of greater than 30% without tabling a takeover bid. But this is not the case for firms that join the markets, and are free to do so if one or a handful of big shareholders retain control of two thirds of the business, or even more, after joining the market.
So it seems the rules may need to be tightened up. If the UKLA does not act there is room for shareholders to get tougher by, for example, voting against company accounts or against the re-election of directors.
The trouble is such votes don't carry much force when one big shareholder always gets their way.
Seven deadly sins: Spotting a dangerous entrepreneur
- Uses company jet/helicopter/yacht for their personal business.
- Gets the company PA to work on their private interests.
- Sells their other businesses to the quoted company.
- Hires consultants or staff linked to themselves or their friends.
- Insists on an overly generous remuneration package.
- Plays fast and loose with the accounts.
- Fills the board with friends happy to turn a blind eye to the above.