Give Hong Kong investors choice of dual-class share options

After being snubbed by mainland e-commerce giant Alibaba for its huge initial public offering, the city's financial officials have been engaged in serious soul-searching. As the IPO market is the lifeblood of the Hong Kong stock exchange, it's understandable its bosses want listing rules to be as competitive as those of premier investment hubs like New York and London to attract newcomers.

A stumbling block has been the long-standing "one share, one vote" rule, from which Alibaba had wanted to be exempted to retain control of its board membership. Hong Kong Exchanges & Clearing made the right decision not to bend the rule for Alibaba. But it does not mean the rule itself should not be reviewed and changed in future. This is why the exchange is now seeking public views on whether to allow potential listing companies to have special shareholding structures that would have allowed Alibaba to list in Hong Kong rather than New York. The exchange says it is keeping an open mind and does not have a fixed position.

The consultation followed proposals made by the Financial Services Development Council, which included changing the rule for the main board or creating new boards for companies, especially hi-tech ones that tend to favour so-called dual-class share structures to retain management control. On the surface, "one share, one vote" seems fair and sensible. In reality, it does not really affect ordinary retail investors, who rarely accumulate a big enough stake in a company to make a difference. Such fights are usually between significant minority shareholders like fund managers and company management.

The jury is still out on whether a dual-class structure is good or bad for shareholder returns. Google, Facebook, Warren Buffett's Berkshire Hathaway and London-listed Jardine Matheson all have similar such share structures, and their returns speak for themselves. On the other hand, a joint Wharton School and Harvard Business School study found that while large ownership stakes in managers' hands tend to strengthen corporate performance, heavy voting control by insiders weakens it.

It appears management quality is the key. If investors are buying into such companies, they are placing their trust in their managers for superior returns. Otherwise, they should avoid investing in them. But there is no reason why Hong Kong investors should not have this choice.