The London Stock Exchange: Strategic Corporate Governance Restructuring After Demutualization

Abstract

This study uses the London Stock Exchange (LSE), forced to demutualize due to major changes in its business environment, notably due to increased competition and technological advances, as field experiment to study corporate governance restructuring to adapt to new market conditions. The LSE improved its financial situation after demutualization and is an example of successful corporate governance restructuring. The LSE significantly restructured the composition of its board of directors following demutualization. The number of exchange members on the LSE board decreased after demutualization while the number of independent directors increased, pointing to a more “monitoring board”, in support of an agency theory approach. Interestingly, the large majority of these independent directors had experiences in diverse business.

The LSE significantly reorganized its management team to adapt to the new strategies triggered by demutualization and modified its compensation by increasing performance-related payments. Results suggest that demutualization brings efficiencies if accompanied by changes in the governing bodies and in the incentive structures of the exchanges. Most of our results could be relevant also, for example, for firms going public, for smaller firms that are expanding their activities and searching for outside investors and for companies facing major changes in their business environments.