“This House believes growing companies best thrive on public markets” was the motion for the recent Quoted Companies Alliance (QCA) City Debate. What really thrived, however, were questions that need an answer if UK public markets are to prosper.

One sensed the view of most there—irrespective of which side of the argument they supported—was that public markets were not working as we would like. Indeed, if this was not the case, why would there be so much talk of reform?

Two-thirds supported the motion (with a 19% swing from the “indicative” to “final” vote). But what the debate really highlighted were the differing views on UK public markets and the questions participants have about their future. Exploring these arguments provides some insight into the issues that may still need to be resolved if the markets are truly to regain their mojo.

Liquid and democratic

Those supporting the motion argued public markets were liquid and democratic. As such, they are best able to support sustainable growth through high governance standards, transparency and accountability.

Evidence shows a moral, social and financial case for public markets. Sure, public markets need reform, innovation and development but for trust in business, public markets are the answer. Steered by effective and aligned non-executives, and smartly regulated, they offer the best governance, discipline and stewardship.

Supporters at the debate said it was misleading to argue that there has been a wholesale movement of capital from public to private markets and that investor returns and revenue growth rates are higher in private markets. There is, it was argued, more innovation, less risk and more societal impact through public markets. A high failure rate among private equity-backed leveraged buy-outs, not helped by partial and selective financial disclosures, was also noted.

Those against the motion argued their experience showed public markets did, in the past, work to provide liquidity and to support growth, but that they blatantly no longer so do. In their experience, AIM is no longer the best place for growing companies to thrive.

They argue that there is no money available to support public markets but rather constant outflows. Around the year 2000, major investment houses had 25% of their portfolios in UK equities. A quarter of a century later, that figure is only about 4%.

Even then, the investments are not in smaller growing companies but rather larger corporates to reduce risk. This shift has happened in part through regulatory edicts, although institutions also behave differently these days, seldom buying in the market to support lagging share prices. Couple this with market-makers that rarely hold stock and you have the recipe for a lacklustre share price.

The need for stewardship

Private shareholders are encouraged to take up the slack but, to do so, need to ensure they have mechanisms to make their voices heard. This requires being able to vote their shares, easy access to research, avoiding (undemocratic) dual-class shares and steering clear of those companies that have abandoned face-to-face AGMs. Implicitly, these investors rely upon institutions properly applying the (albeit voluntary) stewardship code.

For private markets, the north star is long-term growth, not the obligations of the public markets. Freed to ignore daily share prices, earnings and reporting cycles, as well as the regulatory burden of MIFID II, MAR and much besides, growing companies are able to thrive.

Against this backdrop, IPOs and the cachet of the London market, with its deep access to capital, are a thing of the past, a cause only for nostalgia. Today’s public markets are demanding, rigid and punish with disproportionate share price movements. Shares may be used as currency but not if the quoted price is at a discount to other markets, such as New York. Public markets patently do not work if a company cannot raise cash because a share price is “always in the dumps” being played by market-makers and private investors.

By contrast, as well as the ability to run the business away from constant public scrutiny, private equity brings alignment between management and the company backers, with proper pay and share option schemes to incentivise management.

It was argued that for growing companies plc time is pointless, tedious, crazy, a source of constant anxiety and a feeling of chasing one’s tail. Increasing disclosure and regulatory requirements, with the resultant cost, complication and demands on management, weigh down public company directors.

The QCA Code provides a template for governance best practice but there must be a question as to whether it is now too much like the UK Corporate Governance Code. Likewise, in their efforts to manage the audit risk of public interest entities, there are concerns auditors may be coaxing companies into boiler plate governance disclosures also increasing cost, complication and management stretch.

Reduced regulation has been sought, not least by the LSEG, the Capital Markets Industry Taskforce (CMIT) and, above all, by the government. But have the much heralded UK reforms really achieved much so far? Is the regulation we have in place inherently dysfunctional?

Companies have to deal with a multitude of regulators including, but not limited to, the LSEG themselves, the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC), the Insolvency Service and the Takeover Panel. Could it be that there is too much overlap between these bodies, making regulation, in practice, largely ineffective?

Burden of compliance

There is no Sarbanes-Oxley in the UK and attempts to tighten audit regimes constantly falter, while boards are rarely sanctioned for governance failures. But still they endure the burden of compliance, while the City generates substantial advisory fees. We really should be asking whether either the compliance or the advisers’ fees really protect investors?

As soon as the next big corporate failure comes along, there are bound to be calls for more—not less—regulation, so where is the innovation now which achieves competitively priced protection for investors and supports non-executive directors wanting to do the right thing?

Corporate governance that is not overly prescriptive or rigid with disclosure and timely communication to build trust are essentials. But, for their part, public markets need to provide adequate liquidity.

Perhaps the model should be for public markets to be more like private markets and operate with a culture of activism to keep boards honest? That one is still to be answered. As are many of the questions raised in the debate, because the future of UK public markets is so important—not the least to the private equity industry for which a public company IPO often provides an exit for their investment.

Debates are valuable tools and, in this case, less for any conclusions that may have been drawn, but for underlining the questions that still need an answer. The debate motion may have been passed, but it would surely be a lost opportunity for the insights raised on both sides of this argument not to continue to be discussed and dissected.

The QCA Debate is part of a series of Boardroom City debates, chaired by Barry Gamble.