Why proportionality matters for the UK public markets and beyond
23 September 2021

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When there is talk of quoted companies, attention is usually drawn towards the very largest. An organisation that has a potentially seismic impact on the financial markets does not only gain interest from those looking to invest, but also gains a particularly focussed interest from policy-makers. Several corporate failures have led to an apparent breakdown in trust between companies and investors, a contributing factor to triggering proposals for policy reforms. Whilst the UK has been built on democratic principles and policy evolution is necessary to ensure markets are fit for purpose, trends suggest that it is only the voice of a few who matter when it comes to policy development. 

Small and mid-cap companies make an essential contribution to the UK economy. The social and economic benefit of these companies is significant, particularly in terms of employment and tax contribution. In a recent report by Hardman & Co, small & mid-cap companies collectively employed over 3 million people - representing an estimated 11% of total UK private sector employment - and contributed over £26 billion in taxes. They also play an important role in addressing regional inequality. It is estimated that the small and mid-sized quoted company community alone directly employs nearly 1.5 million people outside London and across the UK’s nations and regions. This demonstrates their role in allowing employees within these regions to have a share in wealth creation in the UK economy.

93% of public companies fall into the small and mid-cap category, but when people think of public companies they normally think of a few large international corporations that are worth billions. Of course, this is the profile of companies that singularly have the most impact and so are most likely to draw the attention of journalists and politicians but that attention overshadows the true size and nature of the typical company quoted on the stock market.

This leads to an unfair and inaccurate assessment, and subsequently, potentially unfair and disproportionate policy reforms. Measures which are modelled on the largest companies and yet, are applied in a blanket manner to all, do not serve the UK economy well or the small and mid-cap companies who contribute to it. The Government says its policy is to implement proportionate regulation but often, this isn’t followed through. 

Listing shares on the UK’s public equity markets is now less attractive, evident in the fact that over the last 20 years, the number of companies quoted on the Main Market and AIM has declined considerably. Studies, such as the QCA/Peel Hunt Mid and Small-Cap Investor Survey, indicate the reasons for this decline, with 60% of respondents attributing this to overly burdensome requirements and excessive scrutiny.

The Department of Business, Energy and Industrial Strategy’s recent consultation, “Restoring trust in audit and corporate governance”, reflects the Government’s wavering promise to implement proportionality within its regulatory decision making. In fact, some of the proposals within the consultation are so onerous that it is entirely possible that some companies will not be able to withstand the burden, fundamentally affecting their ability to grow, create jobs and deliver societal wealth. 

This view is reflected in the results of a survey conducted by YouGov and commissioned by the QCA. A large proportion of the respondents felt the reforms would have a negative impact on their growth, with many saying they would re-evaluate the worthwhileness of their company’s listing.

One key proposal within this consultation that reflects this lack of proportionality is the new definition of a Public Interest Entity (PIE). BEIS’ suggested approach is that all companies listed on the Main Market and those on the AIM and AQUIS growth markets with a market capitalisation above €200m should be considered PIEs. However, it is worth noting that the largest company listed in the UK has a market capitalisation of £107bn – over 500 times the size of the companies that sit at the proposed €200m threshold for companies on the UK’s world beating growth markets. Compared with the context of time, this is equivalent to the difference between 1 day and 1.4 years. Such a disparity between companies undoubtedly represents unequal footing. It is therefore unclear why such a sweeping definition has been proposed. 

It is also worrying that BEIS has not shown any consideration of what actually is in the public interest. Their proposed definition includes only a suggestion of what the thresholds should be but lacks any description of what actually ought to be considered “in the interest of the public”. Examining why some business should be deemed to be a Public Interest Entity is needed before further burdens are placed on such a disparate range of companies. Only companies that have the potential to impact a significant proportion of the public, customers, investors or employees, should be included in the definition of a Public Interest Entity. 

In response, the QCA has proposed that the definition of a PIE should initially incorporate all FTSE 350 companies due to their significant and far-reaching impact on various stakeholders. Once the impact of the new policies has been thoroughly assessed, and if it makes economic and social sense, the definition could be extended to other large companies (both public and private and on a market agnostic basis) with a large number of employees (over 500); and a significant turnover (over £500m); or a large market capitalisation (over £1 billion). 

This would be a truly proportionate approach.

Another key concern is the impact of the reforms on company directors. These reforms have the potential to significantly increase the burdens and personal liability that directors face to the extent that their directorship will simply not be worth the risk and cost, particularly in the smaller company space. Often, barriers to opportunity hit those with the least opportunity the most, it is therefore likely that groups that are already underrepresented in leadership roles in UK businesses will be more heavily impacted. This means that these reforms will potentially work against the Government’s stated aim of increasing the diversity of company boards. 

The approach of enabling, rather than restricting public market participants seems more important than ever as the UK seeks to “build back better” in a post-pandemic and post-Brexit world. Maintaining a competitive advantage over the rest of Europe and ensuring the UK continues to be viewed as an attractive listing venue that encourages innovation and growth, whilst maintaining high standards and investor protection, is crucial. Implementing highly costly and burdensome regulation whose value is ambiguous would act as a serious disincentive to companies considering a listing in London.  It’s hard enough already to convince companies that London is their natural home without adding to the arguments against.

The QCA is working hard as the voice of small and mid-sized quoted companies. We want to make listing attractive again, promote thriving public markets and a prosperous and growing UK economy as a result. We believe that the Government wants to do the same and in many instances (but not in  this one) it is taking a welcome lead.  And we believe that the interests of small and mid-caps must be considered in order to achieve this. The UK Government has taken an encouraging approach during Lord Hill’s Listing Review earlier this year and is continuing this work with further consultations that seek to make listing on UK markets less burdensome and more attractive for domestic and foreign companies. It is promising to see such developments and we will continue to work constructively with Government and the policymakers to encourage them to put the views of our members at the heart of this process. We trust that future policy developments in relation to the stock market will include the voice and opinions of the small and mid-cap community, who are so crucial to economic growth. Whilst they may not be amongst the largest of companies, they are the majority, and their voice must be heard if we want such growth.