NMC: stewardship failure

It’s time to say never again, again. More than a decade after the Stewardship Code was introduced, 25 years after the Greenbury Report, the UK is looking at a FTSE100 governance failure.
This is becoming something of a trend. We all fretted about the failure of Carillion in 2018, we all wrung our hands when Thomas Cook fell over in 2019, now we can all despair about NMC Health. A FTSE100 is facing accusations of financial irregularities and is asking lenders for an ’informal standstill’ (which seems to translate as ’don’t ask for your money back right now’), half of its board has gone including the chief executive, the shareholding structure still remains opaque, and the shares themselves are suspended.
This isn’t supposed to happen. The UK is supposed to have a governance regime that is ’the envy of the world’. But what’s the point of having a Corporate Governance Code, or a Stewardship Code, if these failures continue to happen.
There were several issues at NMC that would normally cause anyone interested in governance to do a double take. It shouldn’t take too long to think of companies that have controlling shareholders, and lack independent board representation, that have run into serious difficulties. Sharesoc has criticised fees paid for non-audit work to the auditor, EY. If you add in the fact that this is a largely overseas business benefiting from a UK listing, we would argue that shareholders needed to be extra vigilant.
Shareholders have modest protection built into the system – if they choose to use it. In controlled companies like NMC votes on ’independent’ non-executives have to be reported twice: once including the insider stake and once without. If a majority of non-insider shareholders vote against, the election has to be re-run. It was this mechanism that ultimately forced out former Sports Direct chairman Keith Hellawell. However, as we noted last week, shareholders overwhelmingly did not challenge directors we would have considered not independent, or, indeed,anything else on the AGM agenda. We doff our cap to Financial News for digging into the voting data on this point.
And the regime is seriously flawed in any case. The directors who have quit the board would not have been caught by the voting results provision since they were either designated as non-independent or executives. It’s the same blackhole in the regulatory architecture that shielded James Murdoch from facing a re-run vote when he was chair of Sky Plc. In such a scenario it’s a no-brainer for controlling shareholders to have non-independent board representation. Interestingly non-UK issuers are subject to weaker requirements regarding transparency of share ownership too. The FCA’s disclosure and transparency rules state that a shareholder must notify the issuer if their shareholding goes over 3% and each 1% after that (so a new notification is required when going over 4%, 5%, 6% etc). In the case of a non-UK issuer the thresholds are 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.
However looking at TR1 notices issued by NMC it doesn’t seem to have ticked the box (literally) identifying itself as a non-UK issuer, which makes us wonder about some of the announcements that were, or were not, issued. One TR1 that caught our attention was that issued on 10 January relating to Capital Group’s shareholding. It was shown increasing from 5% to 11.5% (a quarter of the free float). That clearly wasn’t likely to have happened overnight.
Also there are no external shareholders beyond the controlling group shown in NMC’s annual report. For example, Capital crossed the 5% reporting threshold in late January 2019 according to a TR1 issued then. But it does not appear in the list of major shareholders as at 6 March 2019 listed in the most recent annual report.
We know we risk sounding pernickety but a lack of transparency around the ownership of this company’s shares is quite an important point. If the reporting regime is to have any value it has to work properly, and failures in it have to be dealt with.
Finally, and most fundamentally, the UK and investors exposed to stocks that list here, must decide if we want to carry on taking the approach to overseas companies choosing a UK listing that we currently do. At the very least we believe that there needs to be a review of the reporting and voting regime as it applies to non-UK issuers and controlled companies. But we are inclined to think a wider stock-taking is required.

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