On 14 December, we announced a change to the Ground Rules of the FTSE UK Index Series, which includes the UK market indicators, the FTSE 100 and the FTSE All- Share Index. This change saw the minimum free float requirement for inclusion in the FTSE UK Index Series being raised from 15% to 25%.

Increasingly, our index users have been raising concerns that a 15% free float threshold does not provide an adequate cushion for protecting the rights of minority shareholders. These concerns have been prompted by a number of companies, primarily of Russian origin, choosing to incorporate in the UK and so qualify for UK Series index inclusion without having to meet the minimum 50% free float required of companies that incorporate outside of the UK. The concerns were further exacerbated by the actions of Eurasian Natural Resources Corporation, free float 18.5%, that dismissed its independent directors in apparent contravention of the corporate governance code. In response to the concerns raised, FTSE undertook a market consultation to further investigate and quantify the appetite for change amongst all sections of the investment community.

Market participants from all sectors of the market responded to the consultation which was conducted throughout November of last year. The responses represent the views of a balanced cross section of the market, including asset owners and their consultants, investment managers, investment banks (corporate brokers and trading functions), trading venues and trade bodies or associations.

When asked if FTSE should apply a minimum free float threshold of 25% for UK incorporated companies when determining eligibility for inclusion in the FTSE UK Index Series, 83% of respondents agreed. The preference was consistent across all respondent firms with the exception of corporate brokers from investment banks. Even in this category though, some 50% of respondents were in favour of imposing a 25% minimum float requirement arguing that this would provide additional evidence of the London market’s commitment to high quality standards.

The majority of respondents were also in favour of not allowing exemptions to this minimum with several respondents commenting that leaving room for ambiguity would encourage constituents and prospective new entrants to try to engage FTSE in negotiations and so could tarnish the reputation for rules-based objectivity that the UK Series has garnered over the years. Opinion on whether those companies which currently fail to meet the 25% minimum float should be allowed a grace period of 12 or 24 months was more evenly divided, with a small majority in favour of the longer period. Some of those who argued for the longer period pointed out that secondary share issues in the near term might prove difficult if the market environment continues to be volatile in the light of sovereign debt concerns.

During the course of the consultation, there was a strong view expressed by some members of the asset owner community that the 25% threshold did not go far enough. Although a 25% stake by independent shareholders would theoretically enable the blocking of a special resolution put forward by majority owners, in practice it would be difficult to ensure a 100% vote by minorities. In response to these concerns about governance risk, we are planning to undertake further consultation on how governance standards can be further raised. As a higher free float is a rather blunt measure to control governance, we will also explore additional measures which could be employed.

“With the guidance and direction of FTSE’s independent practitioner committees, FTSE regularly consults the market on changes to the Ground Rules of its indices to ensure that the indices continue to meet investors’ requirements and define and lead global standards in indexing. Both FTSE and our shareholder, the London Stock Exchange Group, recognise that this strong stance on governance underpins the value of our business.”

mark makepeace | chief executive | ftse group