The long-term relationship between a listed company and its shareholders is under increasing strain. We advocate a fundamental change to the established commercial bargain that the shareholders "own the company", and a reappraisal as to whether short-term financial returns should be management's pre-eminent concern.

The very public debate about London as an international listing venue exposed this tension. Companies’ lack investment liquidity – no new money from existing shareholders, nor any new institutions looking to invest. Traditional backers of UK equities have made net withdrawals (so-called 'outflows') from the markets for many years, and only recently have there been signs that this trend is reversing.

And for these institutional shareholders: stock prices are depressed, limited liquidity impacts effective trading, and they need to realise cash to fund withdrawals by their own investors. The most investable listed companies have been snapped up by keen-eyed private equity funds, and with a lack of suitable new growth stories coming to IPO, positivity has been in short supply.

It seems that neither company nor investor can do right for doing wrong. It suggests nothing more than an embittered long-married couple, muttering darkly with bitter recriminations at yet another perceived slight. No wonder that shareholder activism is on the rise - with the activist’s intention to realise value through alternative management strategies being countered by the board's defensive suspicion of self-interest.

BUT - we must remain positive. It wasn’t so long ago, at the height of the pandemic in 2020-1, that £30bn was raised by 150 companies on the London markets. That investment wasn’t made from pure altruism - there is huge value in both London’s listed companies and the institutional investment architecture that surrounds it. That is starting to be recognised with rising stock market indices since April and tentative signs of reallocations oc capital towards the UK by global funds.

This relationship just needs to be reset. Various actual or mooted rule changes - Listing Rules, Prospectus Rules, pension reform - are all part of this. But there needs to be a mindset shift to reflect the changed globalised environment, where London is one of many international market venue choices and not automatically on any shortlist - of IPO candidate and institutional investor alike.

So what does a revised bargain between a company and its shareholders look like?

1. Consign to history the concept that “shareholders own the company”. This contributes to unsustainable short-termism. It is already being eroded with greater freedom for management to carry out significant M&A or equity fundraising without shareholder consent. An increased focus on ESG, DEI and employment/pension rights highlights other stakeholders whose interests a company increasingly must cater for. Shareholders should see themselves as “passengers” rather than “owners” - shares are their ticket, and they should hopefully enjoy the ride.
2. Invest in the relationship. The quid pro quo for companies is that they cannot take shareholders for granted, lest they seek alternative markets. So there needs to be an increased energy in shareholder outreach. This can take many forms, but increased transparency and communication, meaningful forward-looking guidance and a clear exposition of strategy are critical. Recognising that certain shareholders’ rights have been removed, companies need to over-compensate to ensure that their shareholders remain invested financially and emotionally, fostering greater trust in the management.

This relationship building is the crux – both sides need to feel valued, engaged and informed. Private equity has absolutely no problem with taking a long-term view. A private equity fund's investment story and long-term plan are shared with their investors; there is buy-in and trust on the fund's management to deliver. Private equity has been the most successful segment of the corporate investment landscape for some time, and in replicating its approach on the listed stage, the narrative surrounding PLCs can and will change. 

But this needs a mindset shift and for the listed sector to take the unfamiliar, more uncomfortable path - we cannot all continue to follow the road that we have always done before, else we’ll end up back here, right where we are starting from.