Hong Kong and Singapore’s corporate governance lead in region narrowed by dual-class shareholding IPOs, say experts
- Hong Kong and Singapore maintain high ranks in report by brokerage CLSA and non-profit organisation Asia Corporate Governance Association
- Principle of fairness ‘under fire’ because of introduction of dual-class shareholding structures
Hong Kong and Singapore maintained their high ranks in a report on corporate governance published on Wednesday, but a decision to allow listings by dual-class shareholding companies has eroded their edge over other jurisdictions in the region.
The report was presented by brokerage CLSA and non-profit organisation Asian Corporate Governance Association. The association ranked Hong Kong second in the region, with a score of 60 in its biennial survey, followed by 59 for Singapore in third position. CLSA, on the other hand, ranked Singapore second with 70.1 points, Japan third with 66.7 points and Hong Kong fourth with 66.3 points. Australia topped the rankings in both cases.
In 2016, the non-profit ranked Singapore second and Hong Kong third, while CLSA ranked the Lion City third and the special administrative region fourth, behind Japan and Australia in second and first places, respectively.
“The introduction of dual-class shares in Hong Kong and Singapore highlights a threat to that fundamental driver [of better corporate governance],” the association and CLSA said in their joint report. While a belief “in the value of transparency and accountability remains largely intact, the third principle, fairness, has come under fire”, they said.
Shareholders with dual-class shares have different voting rights. Through this structure – popular among emerging companies and industries – founding shareholders or key management with minority ownership can still retain control over company board directors and major decision-making.
Hong Kong has allowed companies with dual-class shares to list since April this year; Singapore followed in June, in the face of competition from exchanges in the United States that have long allowed such listings.
Only two mainland China companies with dual-class shareholding structures have listed in Hong Kong so far: Xiaomi, the world’s fourth-largest smartphone supplier; and food delivery service platform Meituan Dianping.
Charles Yonts, head of environment, social and governance and power research at CLSA, a joint sponsor of Xiaomi’s US$4.72 billion initial public offering this year, said its analysts had “marked down” Xiaomi on “fairness” when giving it a score, which was “in line” with the average score given to mainland Chinese companies.
Jamie Allen, secretary general of the Asia Corporate Governance Association, said Hong Kong and Singapore’s lead over other Asian markets would have been three to four points higher, had they not allowed dual-class share listings.
He said he believed the two cities would be able to maintain their edge, as there was no sign yet that lower ranked but close rivals Malaysia and Taiwan would follow suit.
“But the problem in Malaysia is, if they start losing some of their technology companies to Singapore, Hong Kong or the US, then clearly there will be pressure on them. It really depends on what happens in the next six to 12 months, in terms of where some of their companies choose to list,” he said.
Allen said he was worried that a “contagion” had already started, and gave the example of South Korea signalling this year an interest in allowing small businesses and venture start-ups to issue dual-class shares, to encourage more small technology companies to list on the Kosdaq second board market.
Hong Kong was ranked by the association on the basis of “original and independent research”, with no input from outside respondents to 121 questions it designed to assess a country’s corporate governance. The questions cover government policies, regulatory rules and enforcement, investors’ participation in corporate governance and corporate audit standards, besides society and media monitoring. The association also incorporated findings from an in-depth look at disclosure and governance practices of 25 large and mid-capitalisation stocks in each market.
CLSA, meanwhile, used a “bottom-up” approach by examining 1,100 listed companies’ governance in the region.
Allen said Hong Kong’s move to set up an independent regulator for the audit industry next year is positive, but bourse operator Hong Kong Exchanges and Clearing had not gone far enough in its recent corporate governance code revamp, on issues including gender diversity and limits on the number of corporate boards individual directors are allowed to sit on.
In mainland China, the trial of so-called mixed ownership in state companies – private and state capital – had yielded mixed results, said Allen. The reform would fare better on the governance front if private funds were allowed to invest in units spun off from state-owned enterprises, and appoint representatives in their independent new boards, he added.