Divided by a common language…

The familiar soundbite that the UK and the USA are two nations divided by a common language goes back a long way.

In 1887 Oscar Wilde wrote, in The Canterville Ghost, “We really have everything in common with America these days except, of course, language”. And George Bernard Shaw gets a credit for saying in 1942 “England and America are two countries separated by the same language”.

Michael McIntyre also has a take on this theme: https://www.youtube.com/watch?v=UCo0hSFAWOc.

I am increasingly struck, however, by the chasm that exists between the UK and the USA in the business and regulatory world. Language is just the tip of the iceberg. What a different world from Oscar Wilde’s!

Exploring some of these differences is interesting and may, let’s see, give us UK based souls some ideas and reasons for cheer in the face of widespread gloom about UK markets.

1. Sector Weights in Stock Market Indices

As a recent article in The Economist reminds us, the FTSE is woefully short of growth stocks. Only 1% of large-cap British equities are in technology compared with 30% in America. That figure is distorted by Magnificent 7 stocks but, still, Apple’s market cap of $2.60trn is pretty mind-blowing (at a tangent, it will be interesting to see where the US Justice Department’s monopoly suit against Apple goes).

In addition, Goldman Sachs reckons that differences in sectoral composition explain only half of the valuation gap between British and American markets. The remaining gap comes mainly from the firms themselves which tend to be older and slower growing - for example Materials account for 10% of the MSCI UK and 3% of the MSCI USA. Earnings per share of UK listed stocks have grown half as quickly as American listed stocks over the last 10 years.

Hence, we have seen much fretting that the UK market is too cheap and a burst of interest in UK targets such as Curry’s, Direct Line and Spirent. As the FT observed recently:

“Efforts to reform UK pensions, and boost domestic stock market investment, are proceeding slowly. Meanwhile, those running the numbers on pound-shop Britain will still be finding appealing prospects.”

With a view to stimulating retail interest in UK stocks, the Chancellor announced plans for a British ISA in his March budget. This was an additional £5,000 tax-free annual allowance to invest in local shares. It has not, however, been met with acclaim. It has been seen by many as a non-substantive protectionist measure which will realistically be a drop in the bucket.

The building blocks for a more optimistic take on UK markets, with a view to promoting a forward-looking sectoral mix, would be:

1. the hope that financial market reforms which are in the works, such as: (a) the merging of the premium and standard listing regimes, (b) offering more freedom around dual class share structures, (c) abandoning the need for a three-year track record and (d) reducing the free float requirement to 10% succeed in making the UK market more attractive as a listing venue, particularly to tech and other growth stocks. It would be nice to see these steps supplemented by smart tax changes such as the abolition of stamp duty (reckoned to be a 4% drag on share prices);
2. the prospect that the introduction in due course of Pisces (Private Intermittent Securities and Capital Exchange System), as a trading venue bridging between private and public markets, will encourage more interest and liquidity in UK stocks - although critics suggest that it risks encouraging companies to delay going public;
3. the thought that these reforms both reinforce and build upon London’s standing as the venture capital centre of Europe and the UK’s position, per recent FT research, as the host to more start up hubs (24) than any other European country (Germany comes next with 16); and
4. there is some prospect of a more stable economic and political environment after the general election in, let’s assume, the Autumn and progression in pensions reform that would contribute to more liquidity in the market.

We’ll have to see how all this shakes out. There are clearly major headwinds, not least poor UK productivity and the pull of US markets, but we should embrace the pursuit of London as a more lively growth-oriented market in a positive frame of mind.

2. Executive Pay

There is a lot of noise on this topic and increasing media comment, for example in a long piece recently in the Observer by Kalyeena Makortoff and Julia Kollewe.

Here are the key points:

1. CEOs at FTSE 100 companies were paid an average of £4.4m in 2022, compared to an average of $16.7m (then £13.1m) for S&P 500 bosses (and the gulf was wider on a purchasing power basis). The difference is even more striking for the very top business leaders - £15.3m for Pascal Soriot of AstraZeneca and £10.7m for Charles Woodburn of BAE Systems that year compared to $226m for Sundar Pichai of Alphabet and $151m for Nikesh Arora of Palo Alto Networks;
2. there are various reasons for this: (a) larger, more profitable US companies, (b) binding shareholder votes on remuneration policies in the UK but not in the US and (c) shareholders willing to revolt;
3. but the gap has an impact on retention and recruitment and location of primary listing; and
4. examples of this impact would be Laxman Narasimhan who left Reckitt Benckiser early in his tenure to more than double his salary at Starbucks and the move to the NYSE of CRH and Flutter, where senior executive pay flexibility, together with valuation and liquidity, are significant pull factors.

One could of course say that CEOs of UK listed companies are very well paid and that the FTSE 100 CEO to average employee pay ratio in 2022 of 91 times is already high enough without driving for the appearance of more inequality.

However, the reality is that the UK is at a disadvantage when it comes to retaining and attracting top talent. And often it will not be about the last dollar - as much as being appreciated for special value add and having a seat at the top table of international CEOs.

Steps are being taken to address this:

• the Open Letter of the Capital Markets Industry Taskforce (CMIT) of 22 November 2023 argues for an agreement between investors and private market issuers that UK Listed companies “should enjoy a level playing field with regard to remuneration frameworks accepted for listed and private market peers in Europe and the US”;
• this would be one topic which could be addressed by the new Investor and Issuer Forum which CMIT would like to see formed, in succession to the current Investor Forum, in order to drive a governance and stewardship reset and enhanced issuer and investor covenant; and
• the Investment Association (IA), following a consultation with large UK listed firms, is considering updating its pay guidelines although any changes will, the IA says, not go all the way to bridging the UK-US pay gap but be a “step towards it”.

So, a work in progress. However, the mood music, and continued ISS and Glass Lewis opposition to pay rises for senior UK executives that objectively are surely not inappropriate, suggests that things will take time to evolve.

3. Board Processes

UK Board processes have drifted Westwards over recent years. For example, in the 1980s the norm would have been for listed companies to have a pretty even split between Executive and Non-Executive directors but now the norm is for the CEO and CFO to sit on a largely Non-Executive Board.

Whilst there are areas of growing convergence, there do remain resonant differences in practice between the FTSE 150 in UK and the S&P 500 in the USA. I am indebted to the Spencer Stuart Board indices 2023 for the data here. The most interesting takeaways are:

1. Tenure - average non-executive director tenure in the S&P 500 is 7.8 years, whilst in the FTSE 150 it is 4.1 years. This of course is largely a function of the 9-year limit within the UK Corporate Governance Code (the Code), and its implications for succession planning, but the size of the gap might spark some reflection on the balance between the respective benefits of continuity and freshness. For my part, I think that 7.8 is long as an average, whilst 4.1 is short!

   A further (worrying) point is that the average tenure of women directors in the FTSE 150 is 3.6 years which suggests that, although we have made good progress in driving gender diversity on FTSE Boards with 42% women directors in the FTSE 350 per the latest FTSE Women Leaders Review, something is not working when it comes to retention. This may of course be down to fewer women than men sitting as Chairs, SIDs, Committee Chairs, CEO and CFOs.

2. Chair and CEO - there has been a notable trend in the USA towards splitting the roles of Chair and CEO. In 2023 59% of the S&P 500 have split roles and a separate chair, compared with 45% in 2013 and only 16% in 1998. There is a nuance here in that only 39% are independent chairs, with the balance being executive chairs or otherwise non-independent (eg former CEOs of the business).

   But this does represent a notable drift towards the UK where of course a separate Chair, independent on appointment, is expected by the Code.

3. Number of meetings - there is a widely held view in the UK that US Boards meet only quarterly and are less “hands on” than UK Boards. So it is interesting to see that the average annual number of Board meetings in the S&P 500 in 2023 was 7.6. Some of these meetings may have been around continuing recovery from pandemic challenges, but still.

   FTSE 150 Boards meet more frequently, with an average of 8.9 meetings in 2023, of which an average of 7.7 were scheduled.

   Again, some sign of growing convergence here, maybe linking to the rise of the independent chair in the US.

4. Performance evaluation - whilst 98% of S&P 500 Boards report conducting some form of annual evaluation exercise, only 47% disclose that they have some form of individual director evaluation and only 25% report working with an independent facilitator of the process.

   This of course remains in marked contrast to the UK, where FTSE 350 companies are expected to have an externally facilitated evaluation process every 3 years. Food for thought for the S&P 500.

5. Director compensation - this is a particularly interesting area.

   The average compensation for S&P 500 NEDs in 2023 was $321,220, made up of $143,106 as a cash retainer and the balance largely in stock awards. The average additional compensation paid to independent chairs was $175,519. Retainers of between $20,000 and $29,000 on average were paid to Committee chairs, with smaller retainers for Committee members.

   There are three points to draw out here by comparison with the UK: (a) US fees for directors are radically higher than for UK directors. In 2023 the average NED fee was £76,868 in the FTSE 150, with additional fees for Committee chairing and membership being comparable with the USA; (b) a large part of US fees are in stock awards (rather than options). Could we not do more of this in the UK? (c) the gap between NED fees in the UK and Chairs’ fees is very significant, with the average Chair fee in 2023 being £434,000. This is in striking contrast to the US.

   All of which goes to underline the oft-made point that NEDs of UK PLCs are underpaid for the work expected of them (more meetings than in the US) and the business and reputational responsibility which they carry.

   And the gap with Chairs just emphasises the point. UK Chairs are not overpaid - they preside and are always on duty - but their NED colleagues are underpaid. There are echoes here of the executive pay divide, described above.

4. Anti-Trust Regulation

Anti-trust authorities in the US, Continental Europe and the UK wield ever-growing influence over M&A. Increasing interventionism and differing approaches by regulators present serious challenges to would-be deal-doers.

This is a really complicated area. So here, with due humility, is a Ladybird rendition of some of those challenges:

1. in the halcyon days when the UK was a member of the European Union, merger transactions of size were subject to review by the European Commission (EC) under the EU Merger Regulation, without parallel review by UK authorities;

2. following the end of the Brexit Transition Period on 31 December 2020, mergers where the tests for UK turnover (£70m) or share of supply (25%) set out in the Enterprise Act were met or exceeded were subject to review by the Competition and Markets Authority (CMA), in parallel (as applicable) with the EU;

3. the newly empowered CMA has been flexing its muscles, with 29 reviews resulting in prohibition, remedies or abandonment in 2023, compared to 24 in 2022 and 11 in 2021. David Sacks, the former chief operating officer of PayPal, famously said in a podcast in January this year:

   “The UK, they’re like the chihuahua who’s leading the pack. They’re the smallest market but they’re the most aggressive on antitrust enforcement. If you’re a start-up and you’re trying to consider where to put your Europe office, I would not choose the UK any more….it might subject you to a competition authority you don’t want to deal with later when you get acquired.”

   Sarah Cardell (CEO of the CMA) has defended the CMA, saying that they are not excessively interventionist or unpredictable, will be evidence based in assessing mergers and “will engage pragmatically where parties put forward solutions with a genuine commitment to fully resolve our concerns”. Nevertheless, it is clear that possible intervention by the CMA in a global merger is now high on the list of worries for advisors;

4. authorities in the US, the EU and the UK are, moreover, widening the net of their jurisdiction in differing ways. For example:

   (a) the Federal Trade Commission (FTC) and Department of Justice (DOJ) Antitrust Division have, since December 2023, revised guidelines which give them greater flexibility to find potential anticompetitive harm in a merger and encourage aggressive enforcement (eg in relation to a merger’s impact on labour markets);

   (b) the EC is actively encouraging member states to refer transactions to it for review under the Article 22 mechanism where they do not meet any filing thresholds at national level but might otherwise raise competition issues (although, in hot news, this approach is being challenged in the Illumina/Grail case); and

   (c) in the UK, the Digital Markets, Competition and Consumers Bill, expected to come into effect in late 2024, will dispense with any requirement for “increment” in share of supply with the aim of stopping incumbents from picking off emergent competitors.

   The bigger point around a Transatlantic schism in policy is summarised is an article by Rana Foorahar in an article in the FT in February 2024.

   She had just attended a major anti-trust conference in Brussels and concluded that:

   “When it comes to antitrust policy, Americans are from Mars and Europeans from Venus”.

   She explains that whilst consumer welfare underpins the European approach, the Americans “are undertaking a much broader examination of how corporate power is amassed and wielded, and what the consequences of undue power might be - not just for consumers but also for industry competitors, workers and society at large.”

   So, while the FTC, DOJ and White House officials were talking about power rather than pricing, she observes, the Europeans were subdued and divided. Some wanted a more aggressive approach whilst the EC Director General of Competition called anti-trust a “side-dish” to other state policies that encourage competitiveness.

   Clearly the extraordinary power of the US tech champions is a factor here and Ms Foorahar notes that, with the unstoppable rise of the digital economy, where price is often irrelevant, the European side-dish will need to become the main dish.

   Ms Foorahar’s article has ruffled feathers in Brussels - and the EU can fairly point to the powers in its new Digital Markets Act which is beginning to show its teeth;

5. divergent outcomes in merger control proceedings, as between jurisdictions, are increasingly common. As Freshfields point out in their excellent 2024 annual anti-trust review:

   “Authorities’ willingness to explore non-traditional theories of harm, coupled with the growing number of significant merger interventions, is driving divergent outcomes for mergers as regulators identify and assess competition concerns in different ways.”

   Microsoft/Activision is of course the most prominent example. The EC cleared the transaction subject to licensing remedies. The CMA initially opposed it (to a chorus of disapproval) but then cleared a restructured transaction. The FTC opposed the transaction, lost its attempt to stop closing occurring in July 2023, but continues to oppose the deal in federal court.

   Another interesting statistic around divergence, highlighted by Freshfields, is that 25% of mergers reviewed by the EC and the CMA after Brexit have reached divergent outcomes; and

6. the “So What?” points from this alphabet soup of antitrust challenges are: (a) big deals are more difficult to do and, alas, more likely not to get out of the boardroom; (b) antitrust risk must be carefully allocated and, as part of this, “reverse termination fees” payable by the buyer will continue to be sought regularly; (c) long stop dates will need to be, well, longer; and (d) high quality advice will be critical.

5. Takeover Regulation

There is more Mars and Venus here.

There are many differences in the UK and US regimes for the takeover of public companies. 3 key points are worth highlighting:

1. In the UK there is one Takeover Code (the Code) administered by the Takeover Panel, working day to day through its Executive. Whilst other regulations supplement the Code, for example around market abuse and minority squeeze out, the Code is the cornerstone handbook for a UK takeover transaction. There is real time regulation, with the Executive being consulted by advisers on a daily basis and providing rulings on the application of the Code, and recourse to the Hearings Committee of the Panel if rulings are contested. There is no litigation.

   In the US there is a panoply of regulation but no unified code and no equivalent to the Panel with a role to provide day to day rulings on takeover transactions. Thus takeover regulation is the domain of the courts and regulators, such as the SEC. Litigation is a staple of US takeovers.

2. In the UK the interests of the target shareholders are paramount. The introduction to the Code explains that the Code:

   “is designed principally to ensure that shareholders in an offeree company are treated fairly and are not denied the opportunity to decide on the merits of a takeover.”

   This objective is reflected in numerous features of the Code - such as the need for a bidder to have unconditional financing when a bid is announced, equality of information available to competing bidders and a very narrow interpretation of “material adverse change” conditions.

   In the US the emphasis is on the managers to handle process around takeovers, within a framework of due exercise of directors’ duties. Thus, the explicit protections for target shareholders found in the UK are not present in the US. Financing conditions are permissible, there is no requirement for targets to provide the same information to subsequent bidders and material adverse change conditions are interpreted in accordance with their terms.

3. As the most obvious expression of this difference, a UK target is prohibited from taking “frustrating action” which might dissuade a bidder from making a bid, without target shareholder approval. As an element of this a target may not, save in very specific circumstances, agree to pay a bidder a “break fee” to induce the bid, lest that dissuades a second bidder from bidding.

   In the US frustrating action is not in terms prohibited. Indeed, “poison pills”, or rights plans, are relatively common, although their prevalence among large companies has declined over recent years, not least because they are not favoured by activists.

   The effect of the plan is typically that if an acquiror acquires more than, say, 10 or 20% of a target’s common stock the rights “flip-in” and massively dilute the interest of the acquiror. One view is that these plans drive a bidder to engage with the Board of a target (who can redeem the pill) and thus actually drive up bid premia. The other view is that they are not generally in shareholders’ interests because they reduce the likelihood of a takeover bid. This, for example, is the view taken by Glass Lewis.

   It would, of course, be wrong to say that either system is better although, if you will forgive modest bias (given some involvement with the Panel), I am rather fond of the flexibility and immediacy of the UK approach.

   The stand-out point though is just how different things are either side of the Atlantic.

6. And Finally

As I hope emerges from the above thoughts the gulf between UK and US business practice and regulation is highly significant.

Whilst there are learnings as to areas where we in the UK should seek to narrow the gap (for example around executive and NED pay) and maybe curb our enthusiasm (UK merger control), the big win from articulating the differences is probably for parties on either side of the Atlantic to understand the other’s position better.

On a lighter note, I leave you with the thought that there is fun to be had around the difference between English English and American English as explained by the gone but not forgotten (by me) band Wax https://www.youtube.com/watch?v=je4tCHqzDaI:

She whispers something to me

I hear the words but

I don’t know what she means

Oh she speaks American English

Oh don’t always understand.

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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