February 21, 2013 6:36 pm

Bumi’s list of lessons

Plans to impose corporate governance conditions are essential

Nathaniel Rothschild had lost a little bravado when he emerged from Thursday’s battle over the future of Bumi. The gruelling fight for control of the London-listed Indonesian mining group he created three years ago has taken its toll on his reputation as a savvy financial operator. But London too has paid a heavy price for not demanding higher corporate governance standards from candidates before, rather than after, they join the main market.

The idea behind Bumi when it was created in 2010 was to unlock value in emerging market resource companies by imposing UK corporate governance standards, respected management and a gold-plated London listing. The reality proved otherwise. Mr Rothschild’s efforts to change the culture at Bumi proved futile in the face of the company’s controlling shareholder, the Bakrie family. Today shares trade at roughly a third of their market debut, although this is due partly to weak coal prices.

Experiences such as this have prompted a review of London’s listing rules, with investors demanding greater restraints on the powers of controlling shareholders. The UK Listing Authority last autumn issued a consultation document with proposals to impose governance conditions on companies seeking a London quote and greater protection for minorities. Its final decision is due in the coming months.

The UKLA should resist any attempt to water these down, especially in cases where there is a single powerful shareholder. True, there is a fine balance to be struck. The regime cannot be so strict that companies will be diverted to other exchanges. But it must also provide standards rigorous enough to reassure the investors who provide the funds that will draw listings. It is regrettable that though Britain has long prided itself on having some of the world’s most demanding corporate governance standards, the UKLA was content to leave compliance up to companies’ discretion. The voluntary approach of comply or explain proved toothless in the face of dominant shareholders. Failure to enforce continuing adherence to the spirit as well as the letter of these standards will damage London’s sterling reputation. It could also create the risk of political interference.

Meanwhile, Mr Rothschild hopes to fight on. But investors will be wary. They have lost much, while he is still holding a hefty stake awarded as a bonus for the Bumi deal. If Mr Rothschild plans a comeback, he should show good faith by returning those shares.

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