LONDON (Reuters Breakingviews) - Watering down oil is a terrible idea. Yet London’s stock exchange is working on creating a new category of listing to accommodate giant oil producer Saudi Aramco, Reuters reported on Thursday. In doing so it is effectively exploring the fine line between turning a profit, pleasing Saudi royals, and singeing the city’s reputation.
Companies that list in London can opt for either a “premium” or “standard” listing. As well as sounding better, premium is somewhat more onerous. In order to qualify, Aramco would need to let minority investors vote on independent board directors and approve transactions between the company and its controlling shareholder, the Saudi government. Those demands are probably unpalatable. But the standard option would relegate the world’s largest oil company to a second-tier minority alongside mid-cap British groups and family-controlled foreign firms.
Some accept the rules as they are, and others go elsewhere. Activist investor Bill Ackman tweaked the governance of his listed company, Pershing Square Holdings, to get a premium listing this week – making it eligible for inclusion in benchmark FTSE indices. Chinese e-commerce company Alibaba opted for New York in 2014 when Hong Kong and London wouldn’t tolerate its unusual governance. Aramco, which according to its owners is worth $2 trillion, is in a different political and financial league.
The obvious fudge would be to create a new category with the same basic requirements but a more alluring name like “international”. After all, titles matter to Saudi royalty. That would enable investors to avoid it if they felt inadequately protected. By contrast, flexing the “premium” listing to include companies with non-premium practices would leave the whole market worse off. The rules were tightened as recently as 2013 after scandals involving poorly governed mining companies ENRC and Bumi.
Large investors will insist standards are upheld. There’s an element of dishonesty there, though, since many will end up buying Aramco shares wherever it lists. What really matters is that companies listing in London ought to enjoy a lower cost of capital, in part because the market’s institutions are more rigorous, and less beholden to the whims of the rich and powerful. What Aramco gains in status from a bespoke rule-change, London stands to lose.