Here’s the fix needed to kick-start our start-up community
‘A new third board must be an attempt to kickstart or substitute a venture capital ecosystem’
After talking to regulatory officials it appears the Hong Kong government and Chief Executive candidates support the formation of a third board for Hong Kong Exchanges and Clearing. The goal is to attract more technology and startup companies by lowering existing listing and governance standards, especially by allowing dual class share structures.
HKEX has always regretted losing the biggest tech IPO of all time, Alibaba, to New York. Although HKEX continues to attract a large number of listings by mainland Chinese companies, it has missed out on a new crop of Chinese tech companies. It was simply too difficult to make an exemption to the existing main board rules to accommodate anything like a dual class share structure.
Chasing the next tech superstar is a futile task because few of them actually come along. It is arguable whether or not creating a board that allows dual class ownership is a winning solution for attracting China’s future tech giants because this global tech wave may have already ebbed.
When the erosion of shareholder rights become sanctioned by regulators it is no surprise that more indignities follow. So it is no surprise that without voting shares for minority shareholders, Snapchat’s board will not be subject to the “say-on-pay provisions” of the Dodd-Frank Act.
The company stated this in an updated deal prospectus recently. Investors cannot exercise their statutory right to vote against outsized executive pay packages. With such emaciated corporate governance, the board might as well take a “Stalin-esque purge” approach and ban voting and meetings altogether.
Therefore, a new third board must accomplish something more strategic than multiplying listing candidates. It must be an attempt to kickstart or substitute a venture capital ecosystem. Otherwise, it will be a bourse filled with small companies that inflict shareholders with bad governance and little to no trading volume. The overarching goal is to catalyse a genuine early stage funding market in Hong Kong, which has proven very difficult to develop despite all of the wealth in this town.
Wealthy people in Hong Kong are not interested in talking about or investing in risky technology ventures. So this investment segment is best left to foreign institutions and a small number of locals. It is a business requiring specialised skills beyond calling a broker. In fact, these small companies are better off staying private rather than bearing the legal costs of a public existence.
But, a third board of small vencap stocks does solve the problem of providing a venue for promoting relatively obscure ventures. It’s difficult for entrepreneurs to attract the attention of VCs. However, one of Hong Kong’s competitive disadvantages in technology investing is the lack of expertise and independent research coverage compared to the US and Europe.
A main board whose capitalization is dominated by family owned, property conglomerates doesn’t leave much intellectual scope or incentives for banks to analyse new inventions. So if the third board is launched HKEX should fund an independent research institution to support the numerous small companies who need some form of coverage to inform investors.
Last week, a study launched by the Chinese University of Hong Kong, Hong Kong Baptist University and other research agencies showed that Shenzhen’s rate of entrepreneurship was the highest in Greater China. Sixteen out of every 100 adults in Shenzhen was involved in early-stage entrepreneurial activities in 2016, more than a threefold increase from 2009 when it was less than five. This compared with about 9.4 per cent of Hong Kong’s adult population that was involved last year, up from 3.6 per cent in 2009. China’s national average was 10 per cent last year, better than Taipei’s 8 per cent.
Despite criticism of China’s lack of western style liberalism towards ideas, Chinese entrepreneurism proceeds at its own pace. Belief in its growing global power has convinced many Chinese that the human spirit need not, after all, bow to the destined forces of western style evolution and creativity, which many pundits have declared to be irresistible.
In last week’s column, I interviewed Chief Executive candidate Regina Ip Lau Suk-yee who explained that government bureaucrats feared engaging directly with start-ups so there was no way the government would directly invest in them. But, even third tier cities in mainland China operate their own venture capital and investment funds. Perhaps this accounts for China’s domestic VC activity.
The Monetary Authority of Singapore even runs its own fintech investment fund. The Hong Kong Monetary Authority would never entertain such an unorthodox enterprise, but risks billions of our tax dollars in complex hedging transactions every day. Every Hong Kong official I meet offers a deflecting excuse for not taking real action. In a time of creative and industrial crisis, Hong Kong needs to be bold. Our government is too risk averse.
Peter Guy is a financial writer and former international banker