Dual class shares and safeguards

Published November 30, 2017

By Mak Yuen Teen

This morning’s (Nov 30) Business Times’ headline screamed “HKEx poised to take plunge into dual class shares” so Singapore investors should also brace for the SGX doing likewise.

Copyright for cartoon belongs to Mak Yuen Teen

Copyright for cartoon belongs to Mak Yuen Teen

I guess when stock exchanges become demutualised and listed, the pressure to chase profits at the expense of investor (or consumer) protection is too difficult to resist. It’s like our MRT here. It’s pretty simple – more listings translate to more listing fees and more trading that increase the profits of the stock exchange. While lowering governance standards may affect the long-term quality of an exchange and its attractiveness as a listing destination for high-quality companies as investor confidence is eroded and valuations fall, CEOs of stock exchanges may not necessarily think THAT long term. Any mess can be left to future CEOs and their beleaguered regulatory functions to clean up.

With the HKEx now moving forward to allow DCS, SGX – if it does allow it as it probably would – will essentially be competing for those DCS companies that either are not considered acceptable by the US and HK exchanges, or that shun the contingency-fee class actions that protect investors in the US or the more stringent due diligence process and active securities regulators in those markets. Since we are already scrapping for “pawnshops and kopitiams” (as some market practitioners have told me) for listings among domestic companies, SGX will have to continue to chase foreign listings to grow future profits – unless we decide to privatise it, although some may argue that it didn’t really help for SMRT, but I digress. Interestingly, a recent OECD paper shows that not all stock exchanges have demutualised, and among those that have demutualised, there are more that have not been listed yet than those that have. SGX was one of the first exchanges to be demutualised and listed and this was accomplished very quickly – I would argue too quickly, before we had properly considered the regulatory and market infrastructure needed to support a profit-making exchange faced with a limited pool of domestic companies for listing.

Inevitably, the discussion will now go into the safeguards necessary for DCS. I recently reviewed a law paper on DCS in the US that basically argues that some common safeguards just don’t work in practice in the US. If they don’t work there, it’s probably wishful thinking that they will work here. And as I have maintained before – the fact that controlling shareholders in the US owe fiduciary duties to the company and other shareholders, and contingency-fee class actions are available, provide the strongest safeguards in the US. Neither of these are likely to be introduced here.

In addition to some of the safeguards already discussed in the SGX consultation paper, there are others that should be implemented. Firstly, the remuneration of the SGX CEO must have a significant link to number of companies with governance failures and, like CEOs of financial institutions and some other companies, there must be implementable clawback provisions. It’s not enough to say that his performance evaluation includes regulatory key performance indicators (KPIs). I have previously highlighted that a former SGX CEO had regulatory KPIs  – but his annual remuneration had an almost perfect correlation with the annual profits of SGX! Otherwise, today’s CEO will just chase listings with nary a concern for corporate governance failures and the downstream problems his actions will create.

Second, the SGX Regco must have a prominent seat at the table when deciding whether a company (including DCS company) is allowed to list. It shouldn’t be the commercial side deciding on listing and the regulatory side then tasked with fixing. If the SGX Regco supports the listing, then it must be willing and able to take effective enforcement actions when things go wrong.

As an investor and corporate governance advocate, I am truly concerned about the direction taken by the HKEx and worry about SGX following suit. As it is, I am already quite disillusioned with the lack of enforcement for companies already listed on SGX. I have received an escalating number of emails from concerned investors, directors and other market practitioners about apparent lack of enforcement action. I believe DCS will just add to the regulatory gridlock and that it will have a significant negative impact on valuations and further hurt our reputation.


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