Scotland’s industrial sector is changing. In a trend that seems to have picked-up recently, Scotland’s businesses have been steadily disappearing from the stockmarket. Takeovers are whittling down the numbers, with Devro the latest to go and John Wood Group at risk. Does this matter for Scotland’s economic prospects?
Historically, stockmarket listings have offered a route to more finance and delivering growth. Capital raising for listed businesses powered Scotland’s presence internationally in finance. Having stockmarket champions was a key element of Scotland’s financial community, alongside banking and investment, supporting a broad range of professional services. This network of financial services included investment trusts – where Scotland once had 30% of the UK total – and local exchanges. Historically, Scotland’s major cities had thriving stock exchanges – all since rolled into London.
Now, even the London market is set to lose out to competing exchanges; some major multi-nationals have warned they might relocate to the US. Brexit has played a part in this, but major global companies seek the bigger pool of capital available in the US, or are attracted to the lighter regulation in many other international markets. UK regulation is seen as burdensome, and out-of-touch in its approach.
Bids have been a factor in Scotland’s stockmarket shrinkage. Takeovers are easier in the UK than in other European countries. Typically, shareholders decide on the terms of a deal, and if there is public scrutiny at all, it tends to focus on competition rather than, say, regional growth. Promises made during takeovers can easily be set aside a year or two later. The result is that while activity may remain in Scotland, control moves elsewhere. And, with that, in time, Scotland may lose out to other locations for new investment. These takeovers tend to bring a loss of local influence, as strategic decisions may move out of Scotland, along with headquarters and growth investment. The choice of legal firms, auditors and many other corporate services is also usually driven by senior management, and where that leadership is based is important.
Some companies leave the stockmarket disappointed, finding that a listing is not a golden ticket to cheap finance and growth by acquisition. Regulatory change on company research, and a drive towards larger investment funds holding bigger companies, has let down many smaller and medium sized listeds. Private equity now plays a bigger role in funding, operating more freely and with tax advantages.
Some of the stockmarket attrition suggests a pattern to Scotland’s problem. Whether by takeover bids or failing to grasp the growth opportunities on the stockmarket, the disappearance of many of Scotland’s biggest names followed long term failure. Historically, Scotland’s boards must share blame for this, with some lacking strategic vision and a failure to keep up with international competition and attract the best management talent. A number of the listed companies that have disappeared or been taken over were simply inevitable after long periods of poor leadership. The businesses in Europe that have best achieved consistent long-term growth - whether listed or family enterprises - have epitomised careful stewardship. A relentless focus on serving customers and stakeholders must be placed ahead of short-termism.
Added to Scotland’s loss of headquarters of listed companies, has been a concerning trend in mutuals. Mutuals are strong in stable conditions but now that matters less. The turmoil in the global economy of the last three years has placed value on resilience; with focused business models, strong balance sheets and shorter supply chains. As retailer, John Lewis has recently highlighted, it is harder for mutuals to raise new capital. And, financial regulators have encouraged building societies, mutual assurers and friendly societies into a corporate structure to help access to more capital. The disappearance of almost all of Scotland’s mutual life assurers pre-dates the financial crisis, but the last 15 years have also been tough for Scotland’s banks and investment groups. Capital for investment was more easily accessed when Scotland’s cities controlled bigger pools of equity.
Studies on the economic role of listed companies are scarce. But it is instructive to look at how Scotland’s economic structure has changed this century. Many business trends such as increasing competition, consolidation, the role of technology in business, and a relentless focus on costs, have impacted almost all Western economies. Stockmarket listing seems to matter less. More of Scotland’s economic activity and employment is now in subsidiaries of international groups or national UK enterprises, but it is not clear that this is a major challenge to economic growth.
But there are subtle ways in which the old structure helped. The restructuring of Scotland’s industry has seen the departure of some overseas owned plants. Historically, a number of Scotland’s towns had major employers - such as Rolls Royce and Motorola. These not only accounted for significant employment, but crucially were located outside Scotland’s largest cities. They had a key role as anchor institutions for new towns in the second-half of the last century.
The experience of the last three years and emergence of hybrid working, offers huge potential for regenerating Scotland’s towns and smaller cities. There is an opportunity to build on this dispersion of activity with policies that underpin employment in those places. They will not be the large plants of yesteryear, but proportionate to the workforce and skills available.
Looking deeper into the businesses that have changed over the past 20 years, we can see that much of the activity remains. Multinationals and national retailers continue with a presence. And some new financial service businesses have been brought in, such as the major banks that conduct investment administration in Scotland. More recently, there are encouraging signs that some fund administration will re-onshore as resilience comes into focus.
Scotland is not unique amongst smaller nations in losing listed businesses and mutuals, or in finding it harder to attract equity capital for growth. It is certainly tougher with fewer national champions, but we should recognise that changes in work and technology now bring new opportunity.
A version of this article was published in The Herald on 6.4.2023.