Saturday 29 February 2020

FTSE100 corporate governance failure

UPDATED: Very useful info from Chris Hodge added - the ownership disclosure requirements are weaker for non-UK issuers. 

It's not surprising, given the market turmoil, that the crisis at NMC Health has attracted less attention than it would normally get, but it's shaping up to look pretty nasty. At the time of writing, the shares are suspended, the FCA has launched a formal enforcement investigation, the chief executive has gone (following several other directors) and the FD is on sick leave, the company has revealed off balance sheet financing running into hundreds of millions, the company is reported to have pledged future credit card payments from customers to obtain financing, there are reports of staff going unpaid and one analyst has warned that NMC shareholders might at the extreme be left with nothing.

It's pretty amazing that this has happened at a FTSE100, and this is something to bear in mind next time the claims is made that the UK's governance regime is the envy of the world. All this must surely require a thorough review.

First up, let's be clear this is not a UK company in a meaningful sense. Its shares trade here but the bulk of the business is elsewhere. Why are companies like this listed, and allowed to be listed, in the UK in the first place? Surely this example should lead us to look again at the listing rules?

Secondly, it's another controlled company, with a free float of only about 45% (though exactly who had the beneficial ownership the 55%+ is still a little unclear). [actually it looks to me like the free float was closer to 42%] Once again - why do we allow this, and if we are going to continue to do so why are shareholder protections so weak? 

The NMC case really brings this home. The 'protection' is that votes on 'independent' non-executives have to be shown twice, once including the controlling shareholder votes, and once without. And in the latter case if the director gets less than 50% the election has to be re-run. OK, great, but key players at NMC were not caught by this. B R Shetty, the founder and vice-chair who is right in the middle of it all was (rightly, obviously) not designated independent. So the governance regime by design excludes him from accountability. Nor is this glaring flaw in the regime a new thing - think James Murdoch at Sky.

Thirdly, even if all that doesn't bother you, its board clearly had independence issues. Surely in the case of a controlled company like this you have to be extra vigilant, and you should use what limited power you have to push for a board that has strong independent representation. So why so little challenge from shareholders? Looking back at its last AGM the directors barely got a tickle, let alone a slapped wrist. If I was invested with an asset manager that had a big position in NMC and voted for everything at that AGM I'd give them a serious grilling. 

We may need to need to look at reporting too. If NMC was unclear about who owned what it's possible that some of its RNS announcements are wonky. Having had a read through some of them I already have some questions. 

UPDATE: Actually the point in italics below is easily explained. The disclosure requirements for a 'non-UK issuer' are actually less than for UK issuer. Excerpt from the FCA below.

It's not obvious to me why there should be less transparency regarding the ownership of a non-UK issuer. It feels particularly odd in this case given that uncertainty regarding ownership of shares is right in the middle of the story. 

Also I realise that NMC did not tick the box (literally) on the TR1 forms to identify it as a non-UK issuer. Maybe an oversight though.

For example, this TR1 issued in January 2019 shows Capital's holding in NMC going over 5% on 22 January:

Then there's nothing until January 2020, when this TR1 says that on 8 January Capital's position went to 11.5%:

It seems very unlikely to me that Capital held the same position for almost a whole year and then went from 5% to 11.5% in one day, given the size of the move, the limited free float etc. So what's going on there? And when I looked at a share register showing historical holdings in the company, it looks like they went over 5% earlier. I thought TR1s had to be issued each time a shareholder goes over a 1% threshold - am I missing something? 

I appreciate that most market participants aren't going to rely on TR1s for holdings info, but these are regulatory announcements. Perhaps there is a reason why it didn't report ownership going over 6%, 7%, 8% etc, but if so the reporting regime seems a bit pointless. And it may not just be Capital, are there other TR1s that should have been issued? 

This in turn makes me wonder about the disclosures in the annual report. Here is the list of major shareholders in the most recent annual report.

I thought that requirement to disclose major shareholders kicks in at ownership of 3%. If the company issued a TR1 in January 2019 saying that Capital went over 5%, and the statement of major shareholders in the annual report is as at 6 March 2019, why is Capital not in the list?

I'm going to keep digging away at this one, and will blog again as I find more out. At the moment I'm just shocked that this had happened.

Tuesday 25 February 2020

Another Flutter

I'm finding this mildly mesmerising. just Capital's long position (based on TR1 disclosures) versus the total *public* short in Flutter (based on the FCA register).

Saturday 15 February 2020

A little Flutter

Just a chart. Short positions plus TR1 announced positions in Flutter Entertainment from start of October to Friday. The two trend lines are for the short position (lower line) and Capital Group's position (upper line). Bear in mind there are only a few data points for the latter, and as always remember that the short % is just what you can get from the FCA list, so the total will be higher.

Globalisation and small c conservatism

“He… told us we had to go straight to the Celtic Manor in Newport – 50 miles away – by five o’clock to sign the documents and British Coal executives would be flying down to meet us by helicopter. Even I could not believe this. They had won but they wanted us to suffer some more. When we got there, there were 15 senior British Coal executives in all their glory waiting for us. They told us to sign the documents and remember that it was us that voted to close the pit and not them…

“We got back in the car after only about ten minutes at the Celtic Manor and for the first time I started to cry uncontrollably. I’m sure you can imagine that if you are in a car with six miners and one of them starts crying, it really is the others’ worst nightmare. These are tough men and they are good men but they cannot handle a man crying. All they could do was pat my shoulder and say, ‘Ty it will be alright’, but I could not stop. I could not believe we were losing the colliery; even though my father had been killed at Tower, I loved the pit and the people there. I had spent most of my working life there. This was a dreadful day and I hated what they had done to us.”  
Tower of Strength, Tyrone O’ Sullivan

“[A business like Facebook] cannot be easily pinned down, and the question where it is, for purposes of taxation, legal accountability and obedience to sovereign laws and policies may be decidable, but only by convention and without calling upon any basic loyalty of the firm. The arrival of Bitcoin and Blockchain may facilitate this mass escape from the grip of sovereign overlords, by making currency itself into a network of freely associating users, outside the control of any state.

“More and more businesses are built on this model, offering goods and services through networks that ignore national boundaries, coming to earth here and there like Amazon and Ikea, but only temporarily and only where the tax regime is favourable… [T]he the advantages provided by the Internet have given rise to a new kind of business, which owes obedience to no nation state…

“Economic activity has become detached from the building of communities. We do not know the people who produce our goods; we do not know under what conditions they work, what they believe in or what they hope for. We do not know the people who distribute those goods to us, except perhaps as celebrity CEOs – people who seem miraculously to escape all responsibility for their products, which are not their products anyway, but goods moving around the world under their own propulsion, on which they have managed in passing to stamp a brand. Local stores and local producers are successively bought up or driven out of business by anonymous chain. Any when a community tries to defend itself against the intruding giant it finds that all the cards are stacked against it, and that yet another anonymous agent, the abstract ‘consumer’, has already declared a preference for a shopping mall on the doorstep.” 
Where We Are: The State of Britain Now, Roger Scruton

I've been reading an odd mixture of books recently. I'm making an effort to read some people on the Right to try and understand where they are coming from a bit more, hence the Roger Scruton snippets above. But I've usually got something finance and/or ownership-related on the go too. Recently I picked up a secondhand copy of Tower of Strength (thanks for the The Mission gags on Twitter already, Duncan and Andy!) which is about the worker buyout of the Tower Colliery in the 1990s.

There's an interesting overlap in all this. I've blogged a bit before about loyalty (and I keep meaning to write more about it) and it really comes across in these books. Scruton's book is basically about how Britons might pull together post-Brexit, and it is a open attempt to try and find some common ground. As you might expect, I struggle to connect with some of it, but the section on globalisation, from which the snippets above are taken, really interests me in a couple of ways.

Firstly, if you did not know the identity of the writer I think many people might assume they came from the Left, rather than the Right. I think that many/most people on the Left would agree with the tone of it, and there's quite a bit more in a similar vein in that chapter. The notion of modern companies as footloose, almost ethereal entities which can use legal trickery to make profits move from one location to another is a familiar complaint. As is their lack of commitment to any particular region or nation. I could imagine almost exactly the same words being written by Wolfgang Streeck.

Secondly, some of the language is very interesting. I'm particularly struck by the use of the word 'obedience' in a couple of places. The implicit notion seems to be that firms ought to be accountable, at least to the nation or its its government, but no longer are. 'Obedience' is a word that I imagine leaves many people on the Left feeling a little queasy, since it suggests deference to authority. But it's a very powerful idea on the Right, and it plays into Jonathan Haidt's stuff on moral foundations.

Flipping to the Tyrone O'Sullivan book there are some commonalities and some differences. A big difference is that in the passage above 'obedience' - being made to sign the forms shutting the pit - looks very negative. O'Sullivan is a 100% militant NUM guy, his whole history is about workers' self-determination, through the union and then by buying the pit that they worked in. Obedience to those in authority is not an obvious part of his make-up.

At the same time the way he talks about the colliery is very emotional. He and his workmates have a love-hate relationship to it, in that it's where they had many bitter fights with the employer, but also experienced comradeship. It was their home for most of the week. So pretty much the worst thing you could do to them was make them put their names to agreeing to close the pit. And what about the executives - literally flying in, and using a bit of paper to end a way of life. It's almost designed to make Scruton's point. 

The sense of a lack of loyalty, commitment or accountability on the part of companies and executives towards workers or communities or localities seems to link up some otherwise quite disparate groups.    There's a similar thread running through David Skelton's book that I blogged about last month. I suspect that some Conservatives see this as fertile political territory, and this may yet affect the decisions of this government. But that's an unfairly superficial take. Small c conservatives (in various parties) genuinely feel companies are not behaving in an honourable way. 

My sense is that there is still a quite a lot of room for manoeuvre for those that want to try and make companies more accountable. I could imagine quite a radical conservative take on all this that could encompass ownership, taxation, directors' duties etc. It might look quite 'Left' but argued from the 'Right' - in terms of obedience to national law, loyalty to people and place, fairness in relation to paying taxes, and so on. It feels like a potentially powerful mix.

To finish on the same theme here's an excerpt (from a novel) that I've always liked.

In the old days, if a factory owner sweated his workpeople, sooner or later, if things got bad enough they stoned his carriage or booed him in the street. If a farmer was a wicked employer they burnt his ricks. And if a landlord was cruel enough and oppressive enough, they could break his windows, or at any rate march up to his house and caterwaul outside his front door. They knew who the industrialist was, who the farmer was, who the landlord was. Those people had names and faces, and it was common knowledge where they lived… But this new tyranny is quite different. You don’t know where the head of the combine lives, even if you happen to know his name.” 
Brensham Village, John Moore