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What now for the London Stock Exchange under David Schwimmer?

The LSE has named its new chief executive. But can David Schwimmer fill the shoes of his predecessor and steer the company through the challenges ahead? And does it draw a line under the LSE’s corporate governance crisis?

London Stock Exchange
Source: Bloomberg

Xavier Rolet had it all planned out. He had spent eight years growing the London Stock Exchange (LSE) from an £800 million company to the £15 billion giant it is today, and the chief executive was looking to go out with a bang. This was all pinned on merging the LSE with its German counterpart, Deutsche Borse, paving way for fresh leadership to take the business into a new era and allowing Rolet to leave on a high. 

But the collapse of the merger sparked trouble in the LSE’s boardroom. Rolet had said he would leave by the end of 2018 to accommodate the planned merger, but when the deal fell through in March 2017, the LSE board, led by Chairman Donald Brydon, was seeking ‘clarity’ over his succession. 

This resulted in one shareholder, The Children’s Investment Fund (TCI), led by Christopher Hohn, alleging that Brydon was pushing Rolet out and that the chief executive should stay on. The investor ultimately decided to call for a shareholder vote proposing Rolet remained in his role until 2021 and Brydon was removed from the board for mishandling the entire saga.

Learn more: what are activist investors and how do they work?

Rolet resigned amid ‘unwelcome publicity’ and made it clear he was not going to come back. That was one day after Mark Carney, the governor of the Bank of England (BoE), had called upon those looking to keep Rolet in his role to stand down after holding one of several meetings with Rolet.

Find out more by reading a guide to activist investors and how to use them in your trading strategy.

TCI had lost its battle to keep Rolet, and refused to retreat from its pursuit of Brydon (who is also the chairman of Sage Group). The shareholder insisted a vote on his future went ahead. TCI lost its battle after 80% of the vote supported Brydon in his role, including the likes of the Qatar Investment Authority and other institutional players who were trying to maintain some stability amid Rolet’s departure.

Andrew Bailey, the head of the UK’s Financial Conduct Authority (FCA), used the vote to call for calm and for a succession plan to be drawn up that ‘everyone’ could get behind. Brydon has managed to survive and is now likely to see out his term and leave at the annual general meeting in 2019. 

Brydon and his board, already feeling the heat, were then under pressure to quickly find a new chief executive, knowing the decision would be heavily scrutinised following comments from the likes of TCI that the company would not be able to find an adequate replacement for Rolet so long as Brydon was in charge.

Following a seven-month search, the LSE has unveiled David Schwimmer as its new chief executive, who will have to immediately start leading the business through Brydon’s succession and the likes of Brexit. It will be a difficult and lengthy task for Schwimmer to make his mark on a company that will long represent Rolet’s legacy, but there is plenty of opportunity for him to do so.

So, what is in store for the London Stock Exchange with David Schwimmer at the helm?

Taking charge at LSE: Who is David Schwimmer? 

‘It is an honour and privilege to be asked to lead London Stock Exchange Group. It is both an iconic institution and a great business. Having worked with exchanges and other market infrastructure companies for much of the past 20 years, I have been impressed by its strong track record of partnering with customers to deliver innovative solutions. LSE has multiple opportunities for further attractive growth across its market-leading capital formation, information services and post trade businesses,’ – David Schwimmer.

David Schwimmer is leaving a 20-year career at Goldman Sachs to become chief executive of the London Stock Exchange.

Schwimmer started his career at the bank in 1998 working within the Financial Institutions Group covering market structure, brokerage and trading, before becoming the chief of staff to the then-president and chief operating officer, Lloyd Blankfein, in 2005. That year, he played a major role in the merger of the New York Stock Exchange (NYSE) and Archipelago, which resulted in a lawsuit (over the bank working for both sides) being settled out of court.

In 2006, he was appointed as the co-head of Goldman Sachs Russia, as well as head of Investing Banking in Russia and the Commonwealth of Independent States (CIS), which is made up of ten countries formerly part of the Soviet Union.

Schwimmer then moved back to North America, where he was the head of metals and mining in 2010, before being promoted to global head of the unit the following year, and then elected as a partner in 2012. He remained in that role until last year, when he became the global head of market structure, as well as metals and mining investing banking.

When does David Schwimmer become CEO and how much will he be paid? 

David Schwimmer will become the chief executive of the London Stock Exchange on 1 August 2018.

The new chief executive’s pay packet includes a basic annual salary of £775,000, with the potential to earn a bonus equal to 225% of his salary. He will also be paid £1.05 million in March next year to compensate for the bonus he is sacrificing at Goldman Sachs.

There is an additional 2018 long-term incentive plan (LTIP) that would see him awarded shares with a value equal to three times his annual salary if he meets certain targets over the next three years.

The LSE will also pay to relocate Schwimmer and provide a housing allowance for a ‘fixed period’, and provide a cash allowance equal to 15% of his salary in lieu of a pension or UK benefits.

For context, Rolet was on an annual salary of £800,000 when he left the business and had the potential to earn a bonus that could equal as much as 205% of his salary. The LTIP was the same as what Schwimmer has been awarded.

How will David Schwimmer steer the London Stock Exchange?

David Warren, the LSE’s chief financial officer since 2012, took over as CEO on an interim basis when Rolet left. He was already responsible for the implementation of MiFID II, and as that came into force at the end of 2017, it was fitting that Warren oversaw the company as Rolet departed. He will revert back to his CFO role once Schwimmer joins the board later this year and focus on minimising the increasing risk the changes pose to regulatory compliance.

London Stock Exchange and Brexit

Brexit is the big threat Schwimmer will have to get to grips with, but the LSE said during its search for a new CEO that it is ‘extraordinarily well placed to adapt to the consequences of the eventual exit terms’ whatever they are.

Read more: What is the potential economic impact of Brexit?

Schwimmer will undoubtedly play a role in securing the future of London’s financial markets during Brexit negotiations. His predecessor had warned in October last year that France and Germany would risk prompting the next financial crisis if they attempted to break-up London’s financial sector. While the Frenchman was an outright critic of Brexit, the US national’s opinion on the matter is not yet known.

Schwimmer to take on Rolet’s LSE deals and strategies

More immediately, Schwimmer will have to take over Rolet’s last major deals before departing, having acquired the Yield Book and Citi Fixed Income Indices business at the end of August to fold into the Information Services data and analytics portfolio, in what should be a boost for the FTSE Russell’s fixed income analytics and index arms.

Rolet also upped the LSE’s majority stake in LHC Group, which comprises various clearing houses, including Italian clearing service MTS, serving European wholesale government bonds and other fixed income securities. The LSE’s refusal to sell MTS was a key reason why the European Commission wouldn’t approve its proposed acquisition of Deutsche Borse after the deal was dragged out for over a year. It was not the first time LSE and Deutsche Borse had attempted and failed to merge, meaning the potential of a tie-up will forever linger, albeit less so in the current climate.

Schwimmer is expected to continue Rolet’s mergers and acquisitions (M&A) strategy, which was seeing LSE targeting bigger and more complex acquisitions. His US roots could prove useful. Rolet previously spoke of fears that LCH could lose business to the US if Brexit upset the status-quo.

The European Commission’s role in blocking the merger between the LSE and Deutsche Borse has shown that the barriers in Europe remain high, and have also fuelled previous reports that US-based Intercontinental Exchange might bid for LSE. The LSE recently said ‘continued consolidation has fuelled competition including between peers and service providers in different geographical areas’. However, it is likely Brexit and the uncertain outlook will keep any such move on the backburner, for now.

In the background, Schwimmer will also have to take over any potential talks with Saudi Aramco over its potential listing on a foreign exchange, however the belief that Saudi Arabia will list the world’s biggest oil company abroad is dwindling.

Learn more: The battle for Saudi Aramco’s IPO, the battle for the world’s biggest flotation.

For Brydon, he is likely to stay on as chairman on the LSE until next year, when shareholders would hope Schwimmer has settled in. As for Rolet, he is joining the board of Russian fertiliser giant Phosagro as an independent director.

Can the London Stock Exchange share price keep up the momentum?

The LSE has continued to deliver growth in the face of challenging geopolitical conditions and increased competition, enough for shareholders to have shrugged off any concerns over change at the top.

Looking at the last five years, the LSE has consistently grown revenue and profit each year, and the dividend has followed suit. Total income climbed 18% to £1.96 billion in 2017, delivering a 14% boost to operating profit to £603 million and a pre-tax profit of £541 million, rising 16% from the year before. The company lifted its dividend 19% to 51.6p.

LSE share growth

Investors seemed warm to Schwimmer’s arrival and shares closed up 1% on the day of the announcement, but shares have lost some of that gain in early trading this week.

The LSE has constantly outperformed the FTSE 100 by some margin. Its share price trades over eight times higher than it did at the start of 2009 amid the financial crisis, while the FTSE 100 has risen by 75%.

The next scheduled piece of news from the LSE is expected on 24 April, when it will release an interim management statement covering the first quarter of 2018. In terms of financial results, the LSE will only provide revenue figures but, as the update coincides with the firm’s annual general meeting, shareholders can expect an update on the future of the LSE under Schwimmer.

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