Corporate disclosure shouldn’t be outsourced to stock markets
UK chancellor Rishi Sunak’s announcement that large UK companies, whether listed or private, would need to make climate-related disclosures, was a step towards an important principle — that corporate transparency is a public good, and should be driven by governments, not listing authorities.
Way back in the history of finance, big companies were public companies. Only through a stock exchange listing did firms find deep enough pools of capital to become household names and titans of their respective industries. Being private was simply the stage in a corporate lifecycle before flotation.
This era was when many of the norms about corporate disclosure were established — to protect investors in stock, not societies at large. Companies seeking stock exchange listings had to publish audited accounts, and circulate these at regular intervals. Protections grew up around insider trading, closed periods, directors' dealings and much more, which are still with us today. These were enforced by securities regulators, because breaking them was seen as a problem for securities markets.
But the world has moved on, and companies can now grow into behemoths without ever troubling public markets. Tech unicorns, start-ups worth $1bn or more, are now commonplace, and even “decacorns”, worth $10bn or more, aren’t rare. Private equity buyers can happily take a tilt at firms worth $10bn or even $20bn, while even the likes of Unilever, worth more than $100bn, have been targets in the past.
In short, large firms no longer need be listed firms. Companies whose activities can deeply shape our society do not need to offer more than a cursory set of disclosures about their activities. Their management teams need appear in public only on their own terms, or not at all. Disclosures required by company registries are generally cursory, out of date, and often impossible or costly to access.
Disclosures that are of interest to investors are not identical to those of interest to the public, but they overlap.
There is a public interest in understanding corporate tax affairs, environmental and social impact, and the scope and significance of various corporate activities, whether a firm is listed or private. Employees, suppliers and the public should have the tools to assess the prospects and solvency of significant firms — if and when a large company collapses, it is not only equity and creditors that lose out, but potentially society at large.
When WeWork failed to go public last year, for example, this catalysed a mini crisis in commercial real estate markets across the world, with knock-on effects in urban planning, and for legions of start-ups and service providers that used its facilities. But before IPO documents were filed, only a narrow group of private investors, venture capitalists and senior employees had any right to examine WeWork’s financials.
A level playing field on disclosure, where listed and unlisted companies are treated similarly, would also help rebalance access to investments and savings opportunities.
At the moment, retail investors have very limited access to take direct exposure to private companies, often the fastest growing investment opportunities. For every company that a private equity firm takes private, ordinary investors see their universe of shareholdings reduced. Start-ups with bright prospects coming to stock markets allow ordinary investors to participate in their rise.
There are many potential reasons why companies stay private, or go private. Sometimes private equity is better at seeing the value in a stock than the public market, sometimes firms could benefit from a dose of PE rigour in management, sometimes VC firms can see long term growth better than cash-obsessed public markets.
But a desire to hide from disclosure should not be one of them. Management teams wanting to push through a turnaround might want to avoid quarterly investor calls but if their company is big enough to matter to society at large, then it should be accountable to society at large.
In that context, UK chancellor of the exchequer Rishi Sunak’s announcement on Monday is a big step forward. The UK is bringing forward the Taskforce on Climate-Related Disclosures recommendations on, as the name implies, climate related disclosures. But it is explicitly targeting large private companies as well, ensuring that, from 2022, companies over a certain turnover threshold are also subject to the regime. UK companies with a “premium listing” on the London Stock Exchange will be first to be asked to comply from next year, but other big companies will follow soon afterwards.
This means that the new disclosures will not act as a further burden of transparency falling only on listed firms, providing a further reason, if more were needed, for public firms to go private. It’s a simple change, eminently fair and reasonable, and should be followed by much, much more in the same direction.