The ability of investors to act as stewards should not be diluted.
Think about a travesty for shareholder rights, and the recent initial public offering of Snap that offered investors no voting rights, comes to mind. But it is Singapore, not New York, that is at risk of becoming Patient Zero in the global contagion that would be the spread of dual-class shares beyond US shores.
Last month Singapore Exchange asked for views on whether it should allow companies to list with multiple classes of shares carrying different voting rights. If successful, SGX could trigger a global race to the bottom.
The consultation paper is timely in the wake of Snap’s IPO. While that crackled and subsequently popped, it has reignited the global debate on the merits of dual-class shares. The UK too is considering the issue: the Financial Conduct Authority is seeking views on a new “premium-lite” segment for international listings. These could potentially feature dual-class shares, and would “be attractive to companies where there is a founding family or government that wishes to retain control rights that are incompatible with a conventional premium listing”.
Outside of the US, stock exchanges have been able to hold the line in this high-stakes game of prisoner’s dilemma.
Outside of the US, stock exchanges have so far been able to hold the line in this high-stakes game of prisoner’s dilemma. We saw this most recently in 2014 in Hong Kong, when the local exchange issued a concept paper on the issue. While Hong Kong appeared content to push forward, despite overwhelming investor opposition, the city’s Securities and Futures Commission stepped in, likely concluding that the financial gains from dual-class shares would not pay for the damage to Hong Kong’s reputation for good corporate governance.
Yet, here we are again. And this time there is a real sense that were SGX to make such a move, the global contagion would be swift. How could the SFC maintain such a stance in Hong Kong — the world’s largest listings venue for the past two years — in the face of Singapore’s move?
Evidence justifying dual-class shares is at best mixed. The SGX consultation itself helpfully cites a commonly referenced academic paper, which concludes that they can lead to “lower efficiency in the use of cash resources by a company”. It also highlights “empirical evidence indicating that the DCS1 structure reduces firm value.” Hardly glowing references, and this from the SGX’s own consultation paper.
So why are dual-class shares so alluring? The argument goes that management needs insulating from short-sighted investors who will eject talented executives for missing quarterly numbers.
At Aberdeen we have some sympathy for management amid the grind of quarterly reporting, analyst calls and presentations. Yet a January 2017 study from McKinsey entitled “How to build an alliance against corporate short-termism” stated that, despite management’s general bemoaning of short-term pressures, 75 per cent of a shareholder register in the US comprises long term, “intrinsic” investors. So despite this “noise”, management is free to run the business as it sees fit; by extension, long-term shareholders are free to support (or defenestrate) management accordingly. Their support of Unilever’s management in the face of an approach from Kraft Heinz demonstrates this well.
Indeed, investor patience can even be found in the technology sector, the poster child for dual-class shares. Giants such as Apple and Microsoft have succeeded with a single class of share. Another poster child, Amazon, has a single class of shares and Jeff Bezos is still there, investing for the future. The argument about short-termism being particularly dangerous in technology is misleading.
This debate comes at a time of heightened attention on investors, and our role as stewards. Singapore launched its own stewardship principles last year.
Instead of discussing dual-class shares, we should instead be designing a corporate governance framework to help investors operate as responsible stewards.
SGX, like much of Asia and elsewhere, is home to many “controlled” companies — those where a single shareholder is both owner and operator. In such a setting, we need to focus on the role of independent directors. Yet in such a structure, independent directors effectively serve at the pleasure of The King — the controlling shareholder is at once recruitment consultant, nominating committee and majority vote.
The UK has recognised these potential deficiencies and implemented additional safeguards for the election of independent directors in a controlled company. We believe other exchanges should follow suit.
Here, Singapore could take the lead by changing tack. Instead of consulting on ways to dilute investors’ ability to act as stewards, it should be creative in empowering shareholders further. Instead of seeking to further insulate management, SGX should be empowering shareholders to hold the board and management to account.
The SGX is truly at a fork in the road. It could be “innovative” in allowing dual-class shares or maintain its reputation for high quality corporate governance.
Quo vadis, Singapore?
This article originally appeared in the FT on 15 March 2017
Image credit: Jeff Rotman / Alamy Stock Photo
1DCS is dual-class shares.