Back at the beginning of March, the chancellor Rishi Sunak was breathless in his praise for the forthcoming stock market debut of Deliveroo. Despite long-standing complaints from riders about the company’s employment practices, Sunak called the company a ‘true British tech success story’ and warmly welcomed its decision to list in London.
Not even a month later, Deliveroo’s shambolic initial public offering (IPO) saw a string of global asset managers, representing over £2.5 trillion in assets, boycott the listing. They cited concerns about the business, its employment model and its governance. The share price plummeted on the first day of trading, earning the company the title of the worst IPO in the history of the London Stock Exchange.
What went wrong provides insights into the web of relationships between companies, their workers and investors – and a reminder that if you want to speculate on the gig economy, be prepared for a bumpy ride.
First some facts. According to research by City thinktank New Financial, of 1,775 IPOs by UK companies from 1999 to 2020 Deliveroo ranks 1,765th in terms of its first-day performance. Being in the bottom 1 per cent on day one matters because, according to this analysis, only four companies that performed this poorly went on to surpass the price at which the shares started trading within six months. This isn’t to say that won’t happen in Deliveroo’s case, but small-time investors who thought they were going to make a quick profit may be sitting on losses for some time.
Despite the fact that Deliveroo is a loss-making company (like Uber, and Amazon for much of its life, its aggressive expansion model costs more than it makes from its operations), its IPO had been hyped. Not just by the chancellor but also the major banks involved in setting the pre-float valuation and securing initial interest in ‘grey markets’ where investors have the opportunity to take a position in a company based on its potential market value. The FT reported that Goldman Sachs bought £75 million shares to try to prop up the share price. There is a lot of egg on face right now.
The asset managers who took part in the vocal rejection of the IPO (including Aviva, Aberdeen Standard, BMO Global, M&G and Legal & General – the UK’s largest fund manager) cited the company’s employment practices as justification. These financial giants are suppliers of capital to markets all over the globe and their rejection of Deliveroo on labour rights grounds is definitely not business as usual in the City.
While this looks like a win for workers, or at least a moment of being heard, it’s important to be realistic about other factors contributing to the IPO washout. Mainstream financial concerns certainly played a role. There was scepticism about Deliveroo’s prospects and whether Covid-19 lockdowns might be providing a boost to demand that will fall away. Some investors clearly felt it was being overvalued – a position they will consider vindicated by the 26 per cent drop on the first day of trading.
In addition, the company’s dual-class share structure, where some shares have greater voting rights than others, is a major turn off for institutional investors as it effectively protects company directors from outside challenge. It’s a model adopted by Rupert Murdoch’s Newscorp, for example, and has seen a renaissance in the US during the IPOs of Google, Facebook, LinkedIn and Lyft. The model was commonplace in the UK a century ago, but from the 1950s and 1960s onwards, institutional investors (asset management funds, insurance companies and pensions), who were growing and gaining power at that time, essentially organised to overturn it. Its re-emergence as part of Sunak’s plan to attract big tech to London has been presented as a ‘reform’ but investors know in reality it drags governance back by decades. As such it was never going to be a popular move among them. On this point Deliveroo has been caught in the crossfire.
While it is clear that concerns about employment practices did influence some investors, it is hard to disentangle this from financial self-interest. Deliveroo itself made clear that investors should consider the nature of its employment model as a factor in their decision. Its IPO prospectus listed challenges to the classification of its riders as a ‘key risk’ and included over 1,000 words of explanation.
Uber’s recent loss at the supreme court, and its subsequent decision to make concessions on what rights its drivers are entitled to, made this risk all the more palpable. Uber’s share price is notoriously sensitive to debates around driver employment status and its share price fell heavily after the supreme court decision.
With all this in mind, a cynic might question whether some asset manager positioning around the Deliveroo IPO sought to recast a decision based on financial risk and an unfavourable share structure as a principled move on the side of workers. But it would be a mistake to think none of what happened related to the employment model on its own terms. Within the investment world there has been a growing focus in recent years on environmental, social and governance (ESG) factors – fuelling a new market for investment advice and management on matters that are not reducible to a financial bottom line. This boom has been driven in part by asset managers finding new ways to market their products, but also by demand from clients – pension funds, sovereign wealth funds and others – who care increasingly about where their money ends up, particularly in relation to the climate agenda.
Within the growing ESG investment sector, progress on social matters (the ‘S’ in ESG, which includes labour issues) has been weak. This might be unsurprising given the extractive relationship between capital and labour but while it is true that most asset management companies will never be fully at home as advocates for labour rights, the move by several big names to shun Deliveroo on these grounds does signify a shift. There have been a handful of other similar moves recently, including when Aberdeen Standard, a global investment firm headquartered in Edinburgh, divested from online retailer Boohoo last year following the revelation that their Leicester-based suppliers were using sweatshop labour.
While these cases are still the exception, the appetite among some major investors to act on labour risks is growing. The Pensions and Investment Research Consultants (PIRC) has published new research on the potential for foundation asset owners, a small but influential group of investors, to use their capital to bolster a labour rights agenda, in the same way they have done on climate. Coincidentally, just before the IPO, the Department of Work and Pensions issued a consultation paper on a similar topic, targeting occupational pension funds.
So what next? It will be interesting to see whether the reputational harm done to Deliveroo by the IPO failure will lead them to consider improving workers’ rights in order to promote a more investable model. Or the company could double down on its position to hold down labour costs as fuel for its expansion – until employment law catches up.
One outcome of interest to unions, is that the Deliveroo flop has exposed some of the levers that can be used to influence corporate and financial events, like IPOs. Industrial strikes in the gig economy are never easy, and endless litigation over employment rights is costly and draining. In this context, taking any opportunity to stoke trouble in the boardroom will be appealing. The IWGB union’s role in providing evidence of underpayment of riders ahead of Deliveroo’s shares hitting the market (as part of an investigation led by the Bureau of Investigative Journalism), will no doubt encourage more interventions around listings of this nature.
US unions in particular already dedicate significant resources to targeting investors in their organising; this is also done in the UK, albeit less commonly. Examples of ‘capital strategy’ interventions here include the Trade Union Share Owners group supporting campaigns by Unite at Sports Direct in 2016 and against the 2018 Melrose Industries takeover of GKN, a British automotive and aerospace multinational. In the latter case the takeover succeeded on the narrowest of margins, indicating just how close unions got to derailing the deal.
In terms of other IPOs with labour risks attached, an upcoming one to watch is EG Group, a major petrol station retailer that recently bought Asda from Walmart with the help of private equity firm TDR capital. Their labour risk comes in the shape of a recently-won equal pay claim (the largest-ever against a UK private employer) by 40,000 of Asda’s shopfloor workers, predominantly women, potentially worth hundreds of millions of pounds in back pay. EG Group would be minded to settle this before they try to court new investors.
Back to the gig economy, the events of the past few weeks have made investing in this industry a little riskier and pushed the rights of workers up the agenda. While we have seen some movement from both the courts and parts of the City, the lack of action from government means the problematic employment practices will continue – though there is some anticipation that the forthcoming employment bill will wade in on the gig economy, for better or worse. Meanwhile satellite industries that provide private insurance and loans to gig workers in the place of employment benefits continue to grow, so there is no shortage of opportunity to profit from this loophole.
However, a new bar has now been set for asset manager activity over employment practices across their investee companies. Making sure they follow through and apply similar principles across other shareholdings and prospective investments will be an interesting test. For now, let’s cautiously chalk up the Deliveroo floatation flop as a win for labour and get organised for others.
Alice Martin is an adviser to shareholders on labour rights for the corporate governance research organisation, the Pensions Investment Research Consultants (PIRC), and co-author of Unions Renewed: Building Power in an Age of Finance. Tom Powdrill is head of stewardship at PIRC.
This article first appeared in issue #232 ‘Rue Britannia’. Subscribe today to get your copy and support fearless, independent media.
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