• Charles Heighton

It is time for a change in IPO’s

By Charles Heighton – Markets Editor at The London Financial & VP of Trading at King’s Global Markets

We are supposed to be in a great new age of shareholder activism and modern management where all stakeholders are considered during business decisions. At least that is what the business world has led us to believe.

Last year Jamie Dimon, the long-standing CEO of JP Morgan, announced changes to the Business Roundtable’s Statement of the Purpose of a Corporation. These changes meant that the 181 leading CEOs that are part of the Business Roundtable agreed to now act in the interest of all stakeholders not just shareholders. If these words were genuine, then these businesses should be embodying this change.

On Wednesday, the UK-based online retailer, The Hut Group (THG) went public. It was the largest UK IPO in five years. By some measures it was a resounding success, as the stock popped 20% on the open and climbed from there, but by other metrics, this listing was a failure.

The founder of THG, Matthew Moulding is the Chairman and CEO an archaic structure that is highly frowned up for governance reasons. The 2018 UK Corporate Governance Code prevents any company with this structure from being a premium listing, which means they cannot join a UK index like the FTSE 100. Arguably, all stakeholders would be better off in a FTSE eligible company, rather than one that chooses to focus more power in the founder's hands.

Mr. Moulding also has the ability to veto any unsolicited bids for the company for three years. This is definitely not in the interest of anyone other than Mr. Moulding who might lose his role if a takeover occurred. Why should he have the ability to veto a bid that could benefit all stakeholders?

In my opinion, the most egregious aspect of this listing is the relationships that THG has to other companies that Mr. Moulding controls. These other companies receive £19 million in rent from THG annually. This reminds me of the structures that Adam Neumann used to enrich himself during his CEO tenure at WeWork. These deals eventually in part led to Mr. Neumann’s removal. I find it strange that investors have decided that this kind of conflict is now okay less than a year later.

THG was advised by several major banks, one of which was JP Morgan. I find it almost laughable that Jamie Dimon can claim to be hailing a new age of stakeholder focus while still allowing his bankers to execute such one-sided structures.

JPM is not the only one to blame though. Goldman Sachs also advised THG despite the bank’s Asset Management arm being a signatory of the 2012 UK Stewardship Code, which is designed to promote a high standard of Corporate Governance. While the two divisions of the bank should not be directly linked, it is odd that one side believes in corporate governance while the other is helping founders dodge oversight.

The drought of European IPO’s this year may have led to laxer standards, but that should not be an excuse. Investors should not be rewarding this kind of structure even if THG is a great company beyond these considerations. Since institutional investors are the primary buyers of IPO’s, they should be forcing the kind of change that is needed to instill good corporate governance across all corporations.

Allowing THG to IPO with these structures was a failure of many parties who are supposed to be focusing on the needs of all stakeholders. In the near future, I hope that advisors, institutional investors and even founders will stop allowing power to be so concentrated in one person. Businesses are rarely hurt by too much corporate governance, but a lack of it can be disastrous. This year alone, Luckin Coffee, NMC Health and Wirecard have had extensive frauds uncovered. Good governance could have prevented these frauds and protected stakeholders.

It is time that advisors, founders and IPO investors are held accountable for allowing these kind of structures to remain despite the obvious benefits of good governance. When this happens, we will be one step closer to a stakeholder-focused economy.






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