Not All FTSE 100 Companies Are Created Equal

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Commodities, M&A Activity

The FTSE 100 is an elite group, holding as it does the top 100 publicly traded companies representing some 81 percent of the capital value of the whole London Stock Exchange. Sure, there are a number of larger firms around the world which are not listed on the London exchange, but London is disproportionately weighted towards mining and metals companies with a long tradition in funding mining activities.

Many of the world’s top miners and energy companies are listed in London as well as on their home turf, so it was no surprise when ENRC — Eurasian Natural Resources Corporation chose to make a partial float on the London market in 2007.

The surprise is that they were allowed to.

The Historical Context

Ever since the start of the London markets in Garraway’s and Jonathan’s coffee shops in the late 1600s, the rules of trading and listing have been continually revised to protect shareholders and companies alike. The buzzword in recent years has been corporate governance, although the concept is as old as companies themselves.

The issue for any firm looking to list on the London stock market (and the same rigorous rules are applied in New York and Tokyo) is that they be run in a professional manner and the board of directors must be accountable to the owners — the shareholders. In fact, this principal is enshrined in the first and overriding principal, which I quote from the FSA Financial Services Authority in the UK: “Every company should be headed by an effective board, which is collectively responsible for the success of the company.

Following on from this are a series of supporting principals, key among them being the role of non-executive directors, and I quote again: “All directors must take decisions objectively in the interests of the company. As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. Non-executive directors should scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.”

The Crux

The problem at ENRC (and the reason two just-ousted non-executive directors have gone live with the story), is the £9.5bn miner only has 20 percent of its shares on the market; the rest are held by three oligarchs, Kazakhmys, a miner and the Kazakh state. The two non-executive directors are no lightweights either: Sir Richard Sykes is a former chairman of GlaxoSmithKline and his colleague, Dr. Ken Olisa, is also a non-exec on Reuters among other directorships. The boardroom battles they had with the oligarchs highlight the shaky position of former Soviet firms that don the emperor’s clothes of respectability granted by a London listing, but in fact are still privately held enterprises in all but name.

In truth, many now admit ENRC should never have been given a London stock market listing. The rules were bent to allow them to join with such a low proportion of share capital and as Western non-executive directors have sought to hold the company to account in the interest of shareholders, the true nature of the management hierarchy has become clear.

Behind the Numbers – What It All Means

The market is not wholly blind to the opaque nature of the firm’s governance, although the share price has done well since 2007: up 540 percent, according to the Telegraph. The FT says it still trades at seven times earnings, about a 16 percent discount to its “peers.

With shady oligarchs calling the shots and placing their friends on the board, you have to scratch your head and ask, when would anyone buy into such a venture? Whether calling it greed or smart investing, many still do. The latest appears to be newly floated Glencore which, according to Reuters, is looking at a possible buyout of the whole firm. They may get the approximately 44 percent owned by the oligarchs — $19.5bn goes a long way even split three ways — or they may just go for the 26 percent owned by rival Kazakhmys, but that would leave them as a minority shareholder and at risk of the same treatment as London’s 20% shareholders.

Whatever those parties decide, Glencore may yet struggle to get the Kazakh government to part with their 12 percent. They see the FeCr to Energy firm as a strategic asset; 90 percent of the company’s workforce is employed in Kazakhstan; and they are keen for ENRC to contain its investments to a domestic agenda. Still, if I were a shareholder — and I may be via pension fund stock market trackers — I would welcome a Glencore bid. It may not bring transparency, but it should improve boardroom governance.

–Stuart Burns

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