Over the past 20 years, Asia’s regulators have shown a strong commitment to quality and better practices. Unfortunately, that mindset now appears to be changing. While a belief in the value of transparency and accountability remains largely intact, at least in official statements, some governments are showing a striking lack of interest in treating shareholders fairly. In the face of stiff competition from the Unites States for listings of Asian companies, mostly so-called new economy firms from China, certain governments have pushed aggressively for dual-class shares as necessary to maintain competitiveness and fund innovation.
The change has been sudden: when the previous CG Watch was published in September 2016, the region was standing firm against dual-class shares – or second-class shares as they should more accurately be called. Today advocates of dual-class shares are trying to make it the new normal. This development is accompanied by an obsessive focus on IPO numbers as the only yardstick that seems to matter when measuring capital market success.
The leading proponents of dual-class shares in Asia have been Hong Kong and Singapore, which both introduced the structure in Q2 2018, with the decision taking a toll on their corporate governance scores. While both markets still rank in the top three in the Asia Corporate Governance Association’s survey, with Hong Kong coming second with 60% and Singapore third with 59%, they do so by the barest of margins. For example, Singapore would definitely have ranked above Hong Kong were it not for its dual-class shares policy. And Hong Kong would have been several percentage points closer to Australia which tops the list with 70%.
One of the main concerns about dual-class shares being introduced in Hong Kong and Singapore was the potential for contagion around the region. Sure enough, in January 2018 a senior Korean government official, Kim Sang-Jo, chairman of the Fair Trade Commission, mused on the possibility of allowing dual-class shares for firms listed on KOSDAQ, the country’s second market for smaller companies. Then in mid-October the incumbent Democratic Party of Korea sprang a surprise by announcing it would start discussions on dual-class shares for privately held venture firms. We are still waiting to hear the outcome.
Other Asian markets have so far stood firm against dual-class shares and, accordingly, gained ground in our survey against Hong Kong and Singapore. The main winner in this regard is Malaysia which was the biggest gainer on the index, moving up to fourth place from seventh with a score of 58%. Yet officials there and elsewhere acknowledge that they will likely come under pressure to consider dual-class shares if their young firms choose to list in Hong Kong, Singapore or the United States instead of at home.
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