CLSA and ACGA: Some uncomfortable thoughts on dual-class shares in Asia

For almost 20 years, the CG Watch report produced by the Asian Corporate Governance Association (ACGA) with CLSA has been a useful, scientific, principled and well-written account of environmental, social and governance (ESG) progress in Asia.

It has provided a window on the evolution of issues around independent directors, environmental policy, investor voting behaviour and a host of other CG issues across the enormously diverse markets of Asia-Pacific.

Wednesday’s launch of the characteristically fastidious report started with discussion of the big issue of the day: dual-class listing shares.

During the past year, Singapore and Hong Kong have introduced them, and consequently both markets’ scores fell in the ACGA’s reckoning.

Now, beneath Australia’s untouchable 71% corporate governance score, Hong Kong and Singapore (60% and 59% respectively) are just a shade ahead of corruption-blighted Malaysia (58%), a notable narrowing of their usual advantage.

‘Fairness undermined’

Jamie Allen, the ACGA secretary-general and the driving force of the report since the start, left no doubt where he stands on dual-class shares.

“Our feeling now, with the introduction of dual-class shares in particular, is that the issue of fairness is being undermined in Hong Kong, Singapore and some other markets,” he says.

“There’s always been a sense that CG reform builds stronger capital markets, but there’s clearly a feeling now that better corporate governance doesn’t make a market more competitive.”

Allen has argued against dual-class listings for as long as they have been mooted in Asia, and his fear that they will now appear all over Asia seems well-founded.

Kim Sang-Jo, chairman of the Korea Fair Trade Commission, has talked about allowing dual-class shares on Korea’s Kosdaq second board, while the proposed introduction of Chinese depositary receipts is, in Allen’s eyes, a step in the same direction.

“We have the feeling that in China dual-class shares are [considered] a jolly good thing,” he says. “We are quite concerned about that.”

One can’t ignore the fact that CLSA has helped enable the very structure its joint research with ACGA argues is damaging market fairness 

Allen argues that the case for dual-class listings – which allow company founders or executives to have a separate class of share to those of the general public, usually with considerably greater voting rights than the ordinary shares – has not been proven by the evidence to date.

The listing of Xiaomi was widely feted as a deal that Hong Kong would have lost without HKEx having changed its rules to permit dual-class listings: it had previously missed out on the Alibaba IPO, which went to the New York Stock Exchange, where such structures are permitted.

But where are all the others?

“Lots of tech companies are listing in Hong Kong on a one-share, one-vote basis,” Allen says, citing China Literature and Razer as examples. “The idea that new economy companies have to have dual-class shares – the facts don’t entirely bear that out.”

The argument goes, he says, that Chinese tech companies are so enamoured of dual-class shares that Hong Kong has to allow them to attract the right listings.

“But for most companies, it is not the primary reason for choosing Hong Kong, and if it was, we would have seen more dual-class shares,” says Allen. “They came in April. We have seen two.”

CLSA’s head of ESG and power research Charles Yonts then made his own detailed presentation, shedding light on important points around ESG reporting, gender equality, director tenure, short sellers and hopes for a turnaround in Malaysian governance with the change of government.

Unspoken awkwardness

But there was, for the first time in this successful alliance of independently minded institutions, an unspoken awkwardness: CLSA was the joint sponsor and joint global coordinator on Xiaomi, the landmark dual-class listing in Hong Kong and exactly the subject the ACGA has been railing against.

Euromoney asked if, in light of that role, Yonts shared Allen’s concerns about the impact dual-class structures will have on CG in Hong Kong and Singapore?

“Probably no comment,” says Yonts, citing compliance and clearance, though he does note: “I can say clearly it’s something that has come up a lot internally.”

Let’s be clear: CLSA has still published and distributed a detailed report whose opening investment thesis attacks dual-class structures in detail: “second-class shares, as they should more accurately be called”, the report states.

The independence of CLSA’s research appears as robust as ever.

But one can’t ignore the fact that CLSA has helped enable the very structure its joint research with ACGA argues is damaging market fairness.

In any event, Allen’s most salient point is the question of where all the other dual-class listings are. “Hong Kong adds dual-class shares, paving way for tech titans” ran a typical headline in April. The way is still paved. Nobody seems to be using the paving.

If Lufax and Ant Financial end up in Hong Kong using the structure, it will be hard to argue that the dual-class amendment didn’t work in its primary intention – attracting huge Chinese tech deals.

If they don’t, neither any equivalents, then it will be equally hard to escape the feeling that HKEx compromised its principles for insufficient gain.