Thursday, 24 January 2019

Double standards

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  • Jonathan Rogers
Financial hubs claiming the ESG mantle would do well to eschew dual-class shares, says Jonathan Rogers

As someone who watches the environmental, social and governance (ESG) arena rather closely (as readers of this column are no doubt aware), I often wonder how many of the players who express sincerity in aligning with ESG are simply voicing platitudes rather than actively, as it were, putting their money where their mouth is.

I can’t think of a clearer example of this than Singapore’s ongoing debate about allowing companies to list on the SGX via dual-class shares. Dual-class listings allow a disproportionate voting right to holders of the special class of share – referred to as weighted voting rights – and enable holders of these rights to exercise control over a company and avoid dilution.

DCS listings have most frequently cropped up in the start-up sector, particularly among technology and biotechnology companies hungry for initial capital but where owners are leery of consigning what they see as their entrepreneurial “estate” to third parties who brought little or no intellectual input to the project but who would seek to influence the future direction of the company through voting rights – via the traditional means of one share equalling one voting right, and no more.

In the case of start-ups, there are often providers of debt financing, either via loans or bespoke bonds (convertibles, for example) who have entered the picture early on in the hope of finally ending up with a large slug of equity via which they can influence the future direction of the company through their voting rights.

Listings via IPO should facilitate a number of functions, principally the raising of capital to fund the listing company, as well as the provision by the listing venue of secondary equity liquidity, such that the enterprise can be valued with transparency. But of course there’s a lot more to it than that, and this involves, for want of a better term, politics.

WHEN A LARGE household name brand which has a track record of profitability selects an exchange on which to list, it is somehow giving a vote of confidence in the country which hosts that exchange, in terms of its governance and its transparency in matters financial – frequent financial scandals involving listed stocks or stocks seeking a listing are certainly red flags in this regard – as well as itS economic and political stability, viewed from a long-term perspective.

The latter case is bound up with the issue of prestige, the pursuit of which provides something of a cutthroat backdrop for the senior officials of global stock exchanges.

Which brings me back to DCS. There’s something of a battle ongoing between the Hong Kong and Singapore stock exchanges about allowing DCS, with the former having approved weighted voting rights last December and the latter about to roll out its explicit approval by the middle of the year, with June having been pencilled in for the publication of the rules.

To many, Singapore’s move smacks of desperation in a bid to rev up a moribund IPO market which can only pale in comparison to Hong Kong’s, which is rightly seen as a conduit to China’s entrepreneurial and capital markets landscape. Of course accessing China Inc is not without a degree of reputational risk, as scandals involving backdoor listings on NASDAQ and “S-share” listings on the Singapore have shown.

But its hard not to want a slice of the action when it comes handling the primary or secondary listings of Chinese leviathans such as Tencent or Alibaba.

A feeding frenzy of sorts has been unravelling to grab the listing of smartphone manufacturer Xiaomi, which is set to be one of this year’s biggest tech listings. Still, although there is talk the company is eyeing a Singapore listing in DCS format, a few bankers I spoke to suggest the business may yet go to New York.

That wouldn’t surprise me in the context of the US stock market’s prolonged torrid price action. Nor would it surprise me in the context of the deregulatory fever which has a grip on American business practice under the direction of the Trump administration.

BUT I’M trying to work out how DCS fit into what appears to be a wave of ESG-targeted reforms in Asia, rooted in stewardship codes which aim to rationalise the relationship between company boards and investors – principally large institutional investors.

Stewardship codes are designed to improve board transparency and buffer the rights of minority shareholders. DCS seem to rail against that dynamic.

It might of course just be that producing stewardship codes is simply a grand piece of lip service which will demonstrate how up to speed a country is on the ESG front – a “talk” rather than a “walk.”

Indeed, the blunt instrument with which contravention of a country’s stewardship aspiration by company management has tended to be share divestment – France’s AXA dumped coal stocks last year on ESG-related concerns for example – but it seems not to have too much of a long-term impact on a company’s share price when a big fund dumps its stock.

Still, if the entire concept of DCS smacks, if not of blatant spivvery, but rather the striking of a pose which is at odds with the ESG zeitgeist sweeping the investment community, countries such as Singapore should eschew them.

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