5 Thoughts for the New Term

01 September 2022

It has been, to say the least, a strange summer...

On the one hand, there was the sense of liberation at being able to travel without PCR tests, Covid form-filling and quarantine on return. On the other hand, holiday jollity was checked by constant flight cancellation risk, the worst drought in Europe in 500 years and the backdrop of a world in a seriously bad way.

So, as we regroup for the Autumn term and, in the UK, contemplate a new Prime Minister elected not by the whole electorate but by some 150,000 members of one party (go figure), here are 5 thoughts which play into the coming months. I’m afraid that my natural sense of optimism is struggling for air and I frequently find myself humming the seminal “What’s going on?”

1. The dangers of cakeism

It seems that the Duke of York wrote to Thomas Cromwell in 1538 saying that “a man cannot have his cake and eat his cake”. I was interested to read this as I rather thought that the phrase was a confused riff off Marie Antoinette’s alleged “Let them eat cake”.

Anyway, this good advice that “you can’t have it both ways” is of long standing. But in the UK it has been cast aside as we are in the grip of a worrying wave of what has become known as ‘cakeism’ - policies and discourse which necessarily assume that we can have it both ways.

Of course, the cakeist trend has been exacerbated by leadership campaigns that are designed to appeal not to a broad electorate but to a very particular slice of the electorate. According to research led by Professor Bale of Queen Mary University, London in 2020 Tory party members are (a) 63% male, (b) 95% white British, (c) 76% Brexit backing and (d) have a median age of 57.

Whatever your political persuasion, you are going to pause over whether this is a good way to develop the nation’s political and economic policy.

At a time when inflation is 10.2%, the energy price cap is set to rise 80% to £3,549 in October and there are 6m people on the NHS waiting list, both candidates are proposing tax cuts (most aggressively Liz Truss) and an increase in defence spending. The notion that tax cuts pay for themselves is, per Paul Johnson of the Institute of Fiscal Studies, “almost never true” and inflation will in any event erode notional fiscal headroom.

As Mr Johnson says: “Campaigning may be all about promising instant gratification and the best of all possible worlds. Governing successfully is the polar opposite. Not only does it require acknowledging and explaining tough decisions and trade-offs, it often means eschewing instant gratification in favour of long-term planning for growth and stability”.

And cakeism is about much more than economics. Can we really sustain the notion that Emmanuel Macron will remain a “très bon buddy de notre pays” while pursuing the Northern Ireland Protocol Bill which attempts to bless a breach of a contract with Europe which we just signed?

As night follows day, reality will bite.

In the meantime, our collective job, during what will surely be an Autumn of discontent, is not to moan about cakeism (tempting though that is) but, in all our business and personal dealings, to:

  1. advocate the need to confront realities,
  2. make the tough decisions, not the expedient short term decisions, but also
  3. wherever we can, be generous with emotional and economic support.

2. UK Corporate Governance - a Redux

The long-running, energy-sapping, saga of the Restoring Trust in Audit and Corporate Governance initiative rolls on. The Financial Reporting Council published a Position Paper on next steps in July (https://www.frc.org.uk/getattachment/aafabbc3-81a3-4db3-9199-8aaebb070c7f/FRC-Position-Paper-July_2022_.pdf).

The Position Paper reminds us that the Restoring Trust changes will be an assemblage of primary legislation, secondary legislation, changes in existing regulatory measures (such as the UK Corporate Governance Code) and market driven measures. The Paper sets out how the FRC will support the Government’s reforms.

Three takeaways for PLC directors: 1.the current Code will be replaced by a new version, including a. revised provisions for evidencing the effectiveness of internal controls around year-end reporting and b. provisions reflecting wider Board and Audit Committee responsibilities around expanded Sustainability and ESG reporting, for periods commencing on or after 1 January 2024. So, the FRC will consult on a revised Code from Q1 2023;

  1. as the Government works up legislative proposals around areas such as the Resilience Statement and the Audit and Assurance Policy, the FRC will work with Government to propose “ways to reduce the current non-financial reporting burden on companies”. Amen to that; and
  2. in relation to Audit, the FRC will consult on revisions to its Ethical Standard in Q1 2023.

Two other points: (A) If you are a Code sceptic you will love this article by Brian Cheffins from Cambridge https://www.ft.com/content/057accea-5135-4a26-a5ed-e428184bc209. He argues that it is time to abolish the Code as it is too long and outmoded. We could, he suggests, pick up really important bits in the Listing Rules and this overall simplification would help to attract companies to list in London (see further my comments on this theme below). Never going to happen, but a really refreshing challenge. (B) Given all the uncertainty in the world out there it will be important for Boards to take particularly seriously their year-end review of Risk. Have we modelled sufficiently into medium and long term strategy our risks around inflation, labour, energy, supply chain disruption and market volatility?

3. Whither the London listed equity market?

Whilst the listing on London in July of Haleon, demerged from GSK, was some cause for celebration by The London Stock Exchange, the trend line for London listings over recent years makes for gloomy reading.

According to Statista, in January 2015 there were 2429 companies listed on London. In June 2022, there were 1,990. Listed companies are being taken over, or otherwise surrendering their listings, and not being replaced. The fact that less than 1% of the capital raised so far this year in global IPOs was accounted for by London is telling. New York and Hong Kong are much more popular for big companies.

Moreover, London is not attracting new tech stocks - and is struggling to keep those that it has. Aveva, Darktrace and Micro Focus are recent bid targets. London’s much publicised courtship of ARM Holdings seems to have come to nought. And, as Steve Hare of Sage points out, a lack of comparators means that City fund managers don’t devote time and resource to tech, further diminishing the attractiveness of London as a destination for new tech stocks.

Changes have been made to the Listing Rules to accommodate premium listed dual class share structures (often favoured by younger Growth companies), Mark Austin’s recently published secondary market review offers recommendations for helping the attractiveness of the London market, for example around pre-emption rights, and a new Financial Services and Markets Bill was laid before Parliament in July.

But, and it’s a big but, will these developments really move the needle in terms of attracting more, and more tech-led, companies to come to London? It looks doubtful. As The Economist points out, 20 years ago British pension funds had around half their assets in London-listed equities. Today the share is 3%.

Moreover, to Steve Hare’s point, tech firms tend to fear that London investors don’t really understand how to value their businesses.

However, we should not lose sight of the fact that London retains many attractions as a home for publicly traded businesses - good place on the Globe, sophisticated market participants, a flexible and litigation-free takeover framework and a great advisory community(!). Maybe, for the new term, we should all polish up our enthusiasm for those attractions and, in the spirit of the late lamented Tom Petty, “not back down”.

4. The Electric Vehicle myth

I am a dyed-in-the-wool fan of the internal combustion engine and may well be accused of bias when it comes to electric vehicles (“EVs”). But I genuinely believe that we are collectively kidding ourselves if we think that they are optimal transport to a greener future.

Here are some key points:

  1. EVs, of course, emit less carbon than conventional fossil fuel-powered cars when in use. However, their manufacture involves 30-40% more emissions, which need to be amortised over an EV’s use on the road (about 50,000 km to get to carbon neutrality). That’s the trade. However, and I’ll come back to this, the trade would not look so smart if we could keep running our conventional cars, deferring the environmental cost of scrapping them, on sustainable fuel.
  2. The heart of an EV is of course its battery and there are some serious potential bottlenecks in battery manufacture. About 80% of battery cell manufacturing is currently in China and even though that is forecast to fall to 70% over the next ten years that is not comfortable for Western car manufacturers. They are faced with greater uncertainty in West/China relations and potential energy tariffs given the coal that will often, ironically enough, be burnt to make the batteries.
  3. As the Economist highlights, there are also important uncertainties ahead in the mining and refining of lithium (which is key to battery manufacture). They report that (a) Albermarle, the largest traded lithium producer, say that despite efforts to unlock supply carmakers face a fierce battle for the metal until 2030; and (b) China refines nearly 70% of the world’s lithium (as well as 84% of its nickel and 85% of its cobalt).
  4. In addition to the challenges around battery, and hence EV, manufacture there is the challenge of improving the charging infrastructure. In the UK, the Government’s policy announced in March is to add 300,000 public charging points by 2030 (when new petrol and diesel cars will no longer be sold in the UK). Although this is a tenfold increase on the current stock, the Competition and Market Authority suggested that 280,000 to 480,000 would be needed and a host of other practical issues arise in this ambition (for enthusiasts here is a note of some of them http://constructionblog.practicallaw.com/ev-charging-infrastructure-progress-and-challenges/).

I hope that you will agree that there is a lot of myth and wishful thinking around the headlong rush to EVs.

A much better solution to the emissions challenge is sustainable fuels. Coryton (https://coryton.com/sustain/) are doing exciting work and already producing ethanol-derived bio gasoline - although we must be cognisant of the need to ensure that ethanol production does not disrupt food supplies - and Porsche are investing heavily in synthetic fuel development.

Using these fuels will mean that we can all keep running our existing cars (just filling up with bio gasoline rather than petrol or diesel) and don’t have to buy an expensive new EV and then wait 50,000 km for it to become carbon neutral, enduring a load of range anxiety along the way. I know this is all a bit nerdy but it’s kinda cool.

5. Robert Plant

Given that there is a lot to concern us in the prospects for this new term, we may be in need of some inspirational moments. Robert Plant can supply these. From Whole Lotta Love, to the sublime Since I’ve been loving you to the engaging duetting with Alison Krauss (https://www.youtube.com/watch?v=MPZ575AC3wQ), his range is fantastic - a renaissance talent.

His Desert Island Discs is very special https://www.bbc.co.uk/programmes/m00159xd. He has coped with much sadness in his life, particularly the sudden illness and death of his 5 year old son, but remains humblingly upbeat and creative. His humour is very affecting and uplifting.

On being told that he could not have a wicker basket containing three pairs of homing pigeons as his luxury object he didn’t miss a beat and said that he would have a wicker basket containing pictures of three sets of homing pigeons. That would remind him of home.

Treat yourself to a listen.

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

Send this article to a friend...

Further reading