A Renewal Mindset

There is a great deal of commentary in the press around the imminent anniversary of full lockdown in the UK. Surely none of us could have dreamt, in March 2020, that we would still be staying at home after a year.

There has been much loss, much suffering and much hardship. Youth unemployment has risen from 10.5 percent to 13.4 percent, anxiety and depression levels are up and, as Philip Aldrick points out in The Times, the ONS estimates that the 10 percent fall in GDP last year will cause 13,700 deaths through deprivation. Awful.

Looking for the brighter side, many in business would say that they have been impressed and surprised by the facility with which people and systems have adapted to a new, dispersed, kind of normal. Meetings happen, documents get produced, deals get done. In many ways this is testament to human resilience and ingenuity. In the words of Katy Perry, “I will transform”.

Moreover, the roll-out of vaccines across the world gives us hope that there is light at the end of the tunnel. Covid-19 is not going away, and we will surely face spikes as economies open, but the brilliance of the scientists who have developed vaccines and treatments at amazing speed allows us to believe that it can be managed.

It is also springtime. If ever we needed the renewal which this season embodies, it is now.

So, what news and editorial items over recent weeks might we look at and ponder with a Renewal mindset - looking for lessons to carry into a post-pandemic world?

1. Thought for the Day

I don’t think of myself as particularly spiritual but there is something comforting about the 2-minute Thought for the Day slot on the Radio 4 Today Programme every day at 7.50am. It’s a nugget of wisdom from a religious leader or lay commentator to give you something to reflect on as the day kicks off.

A recent piece by Canon Angela Tilby addressed the topic of transience. She observed that the cherry, apple and other blossom that we are seeing now are beautiful but that the “wonder is tempered with melancholy”. Such a well-observed phrase.

We marvel at the grace of the flowers but, in the back of our minds, we are sad that they will only last a few days. Canon Tilby built on this to suggest that everyone should own the reality that “radiant beauty and the deepest sorrow are often intertwined” and that, in the context of the ongoing constraints of lockdown, we should not be impatient for the return of normality. Rather we should strive to make the most of the now - and immerse ourselves in the beauty of spring, understanding that part of its beauty is its transience.

Two other thoughts here:

• the blossom dies, yes, but that allows the fruit to grow - a cycle of renewal; and
• the less good passes as well. As George Harrison says:

*Sunrise doesn’t last all morning

A cloudburst doesn’t last all day*

2. Books and covers

Back in the days when we could go to book shops, a treat would be to wander into Waterstones in search of a new novel. Browsing over the tables and along the shelves I would find myself, consciously or sub-consciously, scanning for striking covers. If the cover was appealing I could be drawn in and read a page or two. Some covers are very smart (remember the cover to A Clockwork Orange - the McDowell character with one eye in the style of a cogged wheel) whilst others leave you cold.

This is a superficial way to assess a book, of course, but we are very affected by first impressions.

It’s the same with wine. I’ve lost count of the number of indifferent wines I have bought because I liked the look of the label.

This propensity to be seduced by appearances is, of course, alive and well in the business world. When I started out in the City in (whisper it) the 1970s my wise and engaging boss used to say to me “Do remember, Christopher, that when pictures start appearing in the Annual Report of a company, it’s about to go bust”.

Which brings me to the Greensill saga. I have followed the development of the story over the last couple of years as the Financial Times has doggedly pursued it. There was something strangely compelling about a business founded by an Australian entrepreneur called Lex (as in, can this be so, Luthor), offering supply chain financing - debt factoring in old money - and advised by David Cameron.

The fatal flaw, as eloquently described by John Plender last week in the FT, was that investors in assets originated by Greensill required credit insurance to cover the risk of non-payment of the underlying debts. When that was withdrawn, the sky basically fell in.

There are echoes here of two other business failures of the relatively recent past:

• Theranos, the blood testing start-up founded by Elizabeth Holmes and grippingly laid bare as a fraud in John Carreyrou’s book Bad Blood, whose board of directors included George Schultz and Henry Kissinger; and
• NMC Healthcare, a FTSE 100 healthcare company founded by a charismatic entrepreneur called B R Shetty, which went into administration after revealing a range of irregularities including the fact that its actual indebtedness was twice its reported indebtedness.

What are the takeaways to carry forward? Three come to mind:

• beware of over-dependence, be it on one individual or on one contractual relationship (such as insurance cover);
• don’t be seduced by the branding halo of famous people being associated with the project. They could be the modern-day physical equivalent of pictures in the Annual Report; and
• if it seems too good to be true there is a real chance that it is.

3. The Listings Review in the UK

Lord Hill’s recently published review of UK Listing rules is an important document. According to Statista, in February 2021 there were 1,985 companies trading on the London Stock Exchange whereas in January 2015 that number was 2,429. That is an alarming decline and so renewal is surely called for, all the more so in light of Brexit and the evident challenges faced by the City.

Briefly, the key proposals are:

• allowing companies with dual class share structures to list with a premium listing. The essence here is to allow founders to float their companies and be within the FTSE indices whilst retaining control (and being free from the risk of take-over) for 5 years. It is an understandable response to the competitive advantage which, for example, the New York Stock Exchange has in attracting tech companies to list. The dearth of major listed tech stocks in the UK (0.82% of the FTSE 100) compared to the USA (27.5% of the S&P 500) has to be a major concern for Global Britain;
• relaunch and rebrand the Standard listing - which involves less investor protection and currently does not allow FTSE index inclusion - as the Main Segment and consult with investors as to the basis upon which Main Segment companies would be included within indices. I certainly get the point that the current Standard listing is not well understood and suffers from an identity crisis - and that “Standard” is a bad word which actually suggests “sub-standard”. However, I am not at all clear how this upgrading (Ford Focus becomes BMW 3 Series) would work in practice. Will it not just promote confusion with the Premium Listing?
• reduce the free float requirement at IPO from 25% to 15% - good idea:
• encourage the listing of special purpose acquisition companies (“SPACs”) by relaxing the current requirement that trading can be suspended on announcement of a potential acquisition. SPACS are of course roasting hot news in the USA and a staggering $47billion was raised in this manner in the first two months of 2021. But they are scary. As many commentators observe, SPACs can encourage bubbles and disclosure is inevitably focussed on potential future revenues rather than the learnings from past audited financial statements;
• there are also structural issues here for investors and learnings from US experience. An interesting paper by Klausner, Ohlrogge and Ruan points out that while SPACs raises say $10 per share in their IPOs, by the time the median SPAC merges with target it holds just $6.67 in cash for each share and that, post-merger, SPAC share prices tend to fall. So, net net, much caution is required in the drive for more SPAC listings on London; and
• redesign the prospectus regime - this is very welcome, particularly in the context of capital raising by existing listed issuers and the provision of meaningful forward-looking guidance.

The Review also suggests that the Chancellor should present an annual report to Parliament on the State of the City. Whilst there must be a danger that this could become a pro-forma exercise it seems to me to be a good way of looking to build some structural discipline (an annual MOT Test) into the drive to promote the attractiveness of the City at a critical time in its life.

I am less convinced by the suggestion that the Financial Conduct Authority be given a duty to take into account, in the context of listings, the UK’s attractiveness as a place to do business. Whilst the Review points to other international precedents, should our regulators not be cautious in setting a regulatory framework? We criticised them for not being cautious enough in the lead up to the Financial Crisis in 2008.

4. Complexity

In Lord Hill’s covering letter which accompanies his Review he says:

“It is…a very widely held view that regulatory requirements on business and the liability profile of companies and their directors have increased significantly over time; indeed, this is one of the frequently cited reasons as to why there has been a trend of companies shifting from the public markets to private ones or never accessing the public markets at all. If we want to increase London’s attractiveness as a place to take a company public, then we need to have consistent policies and messages that back that ambition up in a coherent manner.”

This is a cogent plea for proportionality in the regulation of business at an important moment for the UK. It will be an important ingredient in renewal.

We must hope that the plea has been heard by the Government as they prepare to publish the White Paper on audit and corporate governance reforms.

5. Sunshine

Our spirits were lifted by the good weather during Lockdown 1. We must hope for good weather this Spring as we emerge from Lockdown 3. With that in mind, I leave you with the dated, but wonderful, Walking on Sunshine by Katrina and the Waves https://www.youtube.com/watch?v=iPUmE-tne5U.

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.

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