Plans to open up UK listing rules to attract sovereign-controlled companies are “opportunistic” and “could exert a detrimental impact” on its reputation for sound corporate governance, the Institute of Directors (IoD) has warned.

In a strongly-worded submission to the Financial Conduct Authority’s consultation on creating a premium listing category for sovereign-controlled companies, the IoD flagged up the potential risk for state-run interference over these companies. It has not only called on the authority to reconsider its plans, but to strengthen them.

“We have no objection to the creation of a new sub-set of the premium listing category for sovereign-controlled companies,”said Stephen Martin, director general of the IoD. “However, the proposed rule changes for the new premium listed category are unjustified and could create governance problems.

“At best, they are changes that have been formulated without regard to available evidence concerning state-owned or state-controlled enterprises.

“At worst, they could be interpreted as an opportunistic attempt at boosting short-term primary issuance which ignores the longer-term implications for the overall UK corporate governance regime.”

In its submission, the IoD also highlighted the different types of corporate governance “challenges” identified by previous OECD guidance by sovereign-controlled companies, which includes:

• The potential for undue hands-on and politically motivated ownership interference over the company by the state apparatus, leading to unclear lines of responsibility, a lack of accountability and efficiency losses;
• The state authorities may demand that the company fulfils public policy objectives as well as its commercial activities; and
• Two key sources of private sector corporate discipline—the possibility of takeover and bankruptcy—are likely to be minimal or absent in state-controlled entities.

“We do not understand how removing these rules for, specifically, sovereign-controlled companies can be justified,” Dr Roger Barker, head of corporate governance at the IoD, stated in its submission. “In our view, the need for such checks and balances on controlling shareholder power are as great, if not greater, in cases where the controlling shareholder is a nation state rather than a private person.

“If the UK wishes to encourage state-controlled enterprises to list on the London market, it is important that its listing regime is tailored to address—to some degree at least—these kinds of governance risks and challenges.”