INVESTOR RELATIONS SOCIETY ANNUAL CONFERENCE
Providing the Tools for Companies to Attract Investment
Don Cruickshank
Chairman, London Stock Exchange
Wednesday 28 March 2001
Good morning ladies and gentlemen.
I am particularly delighted to be addressing the conference this year.
This is my first speech to the Annual Conference as President of the Investor Relations Society. I am delighted to be President of an organisation which provides such invaluable services to investor relations practitioners and which helps to enhance corporate value through effective communication.
This year is also the London Stock Exchange's Bicentennial Year. Please don't ask about governance in the seventeenth and eighteenth centuries.
Mind you, formally recognised by law in 1801, the Stock Exchange did not get off to a flying start.
Apparently, on the first day of trading at the newly incorporated exchange, a large brawl developed which resulted in a Constable being called in to calm things down. It's therefore no surprise that since then one of our primary objectives has been to provide an orderly market! It's interesting in the light of some of the issues of 2001, however, to note that the brawl was about a competition issue - restriction of membership - and had been struck down in court. I wonder if the application of effective competition law will be so robust in dealing with some of the obstacles we face today?
I would like to take this opportunity to talk about the issue of attracting (and keeping) investors - one of the prime objectives of the Stock Exchange over the last two hundred years.
Investor relations is an increasingly important part of the whole process. But there are other complementary areas which I would also like to focus on as well.
So what do UK quoted companies need to attract investment?
The Role of the London Stock Exchange
The first requirement, I would suggest is that they are part of a deep liquid equity market.
Specifically, I believe that the primary role of the London Stock Exchange is to assist in the efficient allocation of capital to ideas, providing the essential framework by which companies who wish to raise capital can come together with those who wish to invest. By managing effectively the central price formation process we help to generate confidence and trust for investors.
And when that role is carried out efficiently within a mature market, the potential benefits are great.
From the huge pool of investment capital available in London. Today, London ranks as the number one city in the world - ahead of New York - for investment funds, with some 1.7 trillion under management. That is the equivalent of the entire German Gross Domestic Product.
I see our purpose as creating the quality of marketplace to ensure that our listed and AIM companies can continue to access those domestic and increasingly, non-UK pools of capital as efficiently as possible through our markets.
Increasing Competition
But what are the alternatives that others look to as a future model for capital raising?
The Treasury have promoted a policy of increasing stock exchange competition within the UK. During the last few years, we have seen a number of competitors emerge seeking to win market share away from the London Stock Exchange.
However, we remain the only UK exchange with a primary market capability. A company can only have its shares admitted to trading on our markets. The other exchanges simply seek to provide a secondary market trading mechanism and even then rely on the LSE price formation process.
Nevertheless, competition is likely to emerge much more quickly in future from overseas - from both the United States and Europe.
There are other possibilities, too.
Some might say that an Over the Counter - or OTC - market such as exists for trading eurobonds or foreign exchange may provide the way ahead.
Or maybe the internet has the customer reach to enable share trading in every home.
Or others - particularly academics - fly the kite of direct capital raising via your own company websites.
Two points on these methods.
- First, none of them provides the necessary price formation mechanism, reliability or transparency required for today's investors - particularly international investors.
- And second, as a consequence neither would attract the critical mass of investment that is drawn to an established exchange like London. This critical mass brings efficiency gains that lower the cost of capital across the board.
But - established as we are - we need to keep ahead of the game. We are fully aware that our customers will look elsewhere if we do not continually evolve and adapt, especially in the way we use modern technology to better serve smaller quoted companies.
So within a liquid central market, we are determined to see appropriate market structures that suit the needs of companies at different stages of growth.
AIM Market
AIM is an example. In 1995, we introduced the AIM market which provides a first step into the public market for growing and fledgling companies. It is a complement to - and some may argue competition to - venture capital funding.
Since its launch, over 850 companies have joined the market, with over 6 billion in equity capital raised. Last year alone, over 170 companies joined the market.
In short, it has more than fulfilled the role that we set out for it six years ago.
techMARK
In 1999, we launched techMARK, the Exchange's market for innovative growth technology companies. It groups together companies from a range of FTSE industry sectors into a market with its own listing rules and admission criteria.
This market has its own set of indices. These were constructed in the belief that associating smaller companies with larger more established counterparts heightens their profile and visibility to institutional investors. techMARK is working, even in today's market conditions. No loss of confidence in difficult market conditions - that's our benchmark for the operation of the London markets.
Providing Services to Companies
As well as creating the right market structures, the Exchange has much developed a number of services to inform companies of the benefits and responsibilities of the listing process, along with more indirect means of capital raising such as best practice investor relations.
Over the last year, the Exchange's website, for example, has been developed and it's now a valuable resource for private investors to obtain information about companies listed on our markets. It also offers company announcements via the Regulatory News Service and fifteen minute delayed price information.
Each company on our markets now has its own dedicated page showing the company's share price, graphical share performance and company information. We will also build on the success of techMARK by introducing new attribute groups to give companies the tools they need to communicate more effectively with investors. We would like to provide, for example, a greater regional focus to provide heightened profile and visibility for Main Market companies.
The end result: a website that is serving you and becoming much better. And better to come.
Moving Forward
And generally, we must move forward, so:
- First, we intend to expand our service offering by upgrading our trading systems, supporting clearing and settlement services and building on the successful introduction of the Central Counterparty - a UK initiative with LCH, CRESTCo and LIFFE. This will reduce risk by offering scope for netting which will lead to lower costs.
- Second, we want to introduce new equity-related products to complement extraMARK with its existing Exchange Traded Funds.
- And third, we are going to build on the success of AIM and techMARK by marketing them to European investors and companies.
Developing AIM and techMARK
Let me say just a few words about the internationalisation of AIM and techMARK.
AIM and techMARK are already Europe's largest technology and growth
Markets accounting for 81% of European market capitalisation and 83% of
total trading by value.
But we want to make the strengths of these markets more widely known around Europe. We'll do this by investing heavily to extend the reach of these markets and raise their profile across Europe. Tomorrow, Martin Wheatley, our Deputy Chief Executive, will be in Frankfurt - the home of the Neuer Markt - telling German investors about the benefits of AIM and techMARK.
As we attract new customers to these markets, it will add to the liquidity of the whole marketplace and improve further the capital-raising ability of UK companies.
London's Standards of Regulation
Let me talk about one of the key selling points of our AIM and techMARK marketing campaign: Regulation.
London's standards of regulation are world-class and certainly the best in Europe on issues such as corporate governance and disclosure of company information.
For example, a daily average of 700 announcements are now made by companies through our Regulatory News Service - compare this with around 20 per day from Deutsche Brse. Does this mean that less happens in Frankfurt? Or more likely that the rules governing what is disclosed are much weaker.
Next, corporate governance. Recent research suggests that UK companies not only lead their European counterparts; they lead US companies as well. For example, research commissioned by major international institutional investors, rated 300 European Union listed companies based on Corporate Governance standards.
The results are clear. A score of 18/20 for UK companies - almost twice the score of anyone else. UK companies have far better corporate governance than their European counterparts.
What does this add up to? A high quality market and well-governed companies make for a more informed choice by investors, and lower costs of capital.
Strategic Issues
Let me conclude my remarks with a few words about some strategic issues which currently restrict the ability of companies to attract domestic and international capital.
First, here in the UK.
Stamp duty is an outdated transaction tax that has no place in a modern interconnected economy.
Worse:
- it erodes our competitiveness by increasing the cost of investing in UK companies; and
- it erodes the competitiveness of UK companies because none of their competitors in the United States, Germany or France and much of the rest of Europe suffer the effects of such a tax.
Be assured - the Treasury are clear about our own views on this.
The second strategic issue I want to touch on is the need to move towards paperless electronic share holding, particularly in view of the move to three day settlement and the successful introduction of the central counterparty.
All of our major competitors have achieved paperless systems while up to half of all UK retail trades still wait for the certificate. Now we know from the mail we receive at the Exchange how deeply attached many UK investors are to the present system. There is, however, a steady trend towards electronic share holding and I am fully aware that retail investors need to be reassured that they would still receive comparable shareholder privileges from a paperless system and that the cost would be more than made up by efficiency gains.
But we are determined to move ahead with CRESTCo and the broking community because - along with stamp duty - it is a major issue inhibiting the competitiveness of the UK equity market.
Third, the absence of a single market in financial services in the European Union.
The London Stock Exchange strongly believes that more needs to be done
to complete the EU single market in securities trading so that cross-border
investment is as easy as domestic investment.
The Lamfalussy Committee on securities regulation recently produced its final
report. We had previously given the Committee our own view on how the EU
capital market should develop and we strongly welcome its
recommendations, for example, that there should be:
- enhanced co-operation and networking among EU securities regulators to ensure common implementation standards, rather than an all-embracing European 'SEC' which wouldn't work and which no-one wants.
- examination of the clearing and settlement area by the Competition authorities to ensure that competition policy is being properly respected and that the vertically integrated silos - where exchanges and clearing and settlement agencies are under the same ownership - do not act against the interests of investors.
We were therefore pleased to see that the European Council has adopted the
package and we will assist the Commission in bringing these proposals to
fruition as soon as possible.
Now, on all of these strategic issues, we ask for your help and your support. Addressing them is in our interest, there's no doubt about that; but they are undoubtedly in your interest, too. It may be a long road, but we are determined to win these issues.
To end, I am delighted to have the opportunity to talk to you this morning. As both the London Stock Exchange and Investor Relations Society look ahead, the interests of investors and issuing companies remain our shared and primary driving force.
Thank you.