Sense and flexibility could keep Unilever in the FTSE 100

A shareholder revolt is brewing over Unilever’s Dutch move. Last week the consumer goods company confirmed it will proceed with changes to its corporate structure and move from a dual-governance arrangement in the UK and Netherlands to a single headquarters in Rotterdam.

This is not linked to Brexit, nor does it mean job losses in the UK; the maker of Marmite and Dove soap will retain a strong corporate presence in Britain. But it has significant implications for shareholders. Many of them, particularly index tracker funds, would be forced to sell the stock if unification means it can no longer be included in the main British equity index, the FTSE 100. Insurer Aviva has already said it will oppose the move.

There are strong arguments for any dual-headed company to unify and benefit from economies of scale. Once united, it will have greater flexibility to use its equity for mergers and acquisitions. Unification may also allow the company to defend itself better from any hostile bid. Planned tax changes in the Netherlands have also played a role in the decision. But for the UK listing issue, the choice for Unilever shareholders would be straightforward: vote to support a simplified structure and benefit from any subsequent value creation.

The easiest solution to shareholder concerns would be to allow Unilever to retain its FTSE 100 membership. This is not as radical as it may sound. Commercial owners of indices have tremendous discretion over inclusion rules. FTSE Russell, which is part of the London Stock Exchange Group, makes the decision on this. Surely, shareholders ought to be focusing on this group?

There is recent precedent from a decision last week involving another Anglo-Dutch company with a substantial global business, Relx — previously known as Reed Elsevier. Like Unilever, it was dual-listed in London and the Netherlands and in February it decided to unify — again for commercial reasons. Unlike Unilever, it chose to move the other way and unify in London, allowing it to retain its place in the FTSE 100. But Relx’s second listing in the Netherlands also remains a member of the equivalent Dutch index.

That made sense. Unilever’s move now affords the same opportunity to the UK — to employ flexibility in how we apply our own rules. British Airways parent IAG and travel group Tui are both FTSE members, even though their headquarters are now in Spain and Germany respectively, and they have dual equity listings. Unilever should apply to stay in the index rather than assuming its exclusion is a given.

For its part, FTSE Russell just needs to show flexibility, as it has in the past. If that is a step too far for the index, then perhaps it should amend its rules to ensure this problem does not recur. In which case, I would suggest it add clear criteria for companies who want to both unify and stay members of the FTSE 100.

First, the market where the unified company is being incorporated should be a developed country and one where it was already dual-listed at the time of unification. Second, the group should already be a FTSE UK series member and previously assigned UK nationality. The company should also be required to have a premium listing in London, pass liquidity tests there, and promise to adhere for at least five years to UK corporate governance requirements, including those protecting shareholder rights during equity issues and takeovers.

Keeping as many global players in the FTSE 100 index as possible is important for London and should be a priority. As more of global growth comes from outside Europe, competition between big equity indices will intensify.

Why should such a British brand not remain listed on the FTSE 100? All that is needed is good sense and flexibility.

The writer is chief economic strategist at Netwealth and adviser to Parker Fitzgerald

Letter in response to this article:

Discretion should help to keep Unilever in FTSE 100 / From Bill Wiggin MP, London, UK