It looks like the authorities will be approving dual class shares (DCS) structures in Singapore soon. This move gained momentum in August with a vote in favour by the Listings Advisory Committee, and was discussed at a round-table discussion between the Singapore Exchange and the National University of Singapore Faculty of Law.
Based on anecdotal evidence and experience, DCS would most likely be approved by the authorities in due time.
Benefits of DCS
Would such a structure benefit Singapore? There are some who argue that having DCS would give Singapore an edge over the HK exchange, where DCS is not allowed. SGX would have the advantage of being the only exchange permitting DCS in the region, and could attract more listings from companies around the region.
There are others who argue that this is beneficial for rising tech start-ups where companies may require capital to grow further, and still allow the founding members to make key decisions for the company without having to focus on short-term gains to appease shareholders. This would allow the founding members to focus on long term growth instead.
Safeguards for DCS
One of the discussed safeguards to protect investors' interests is to make it mandatory for a dual class listed company to implement a code of corporate governance. Another safeguard would be to have independent directors voted in on a one-share-one-vote basis. Yet another proposed safeguard would be to increase investor awareness over the governance structure of companies.
Pitfalls for DCS
IMHO, I am against such a move. I believe that the pitfalls of having a DCS structure in Singapore would be detrimental to the investing environment here, and would further weaken investor interest in Singapore-listed shares.
Presently, all ordinary shares (excluding prefs) have equal voting rights. Despite retail investors holding a minuscule portion of voting power individually, this is commensurate with the amount of financial risk each individual takes when investing in a company. Even with the minuscule voting power, retail investors have the ability to band together, and as their combined financial risk increases, so does their combined voting power.
DCS would serve to destroy this. For a company with Class A ordinary shares and Class B shares with 10x voting power, having 10% of total company shares as Class B shares in the hands of founders would give them majority voting rights in the company. This would mean that with a 10% financial stake in the company, the founders would be able to enjoy full autonomy over most decisions in the company. The graph below shows how the voting power of higher-voting shares increase as the percentage of this higher-voting share increase with respect to the total company shares:
There would be little to prevent them from making decisions beneficial to them yet detrimental to the company, such as paying themselves exorbitant management fees. Such a structure would have the potential to fleece the investing public of their money. An example is given in
Investopedia's article on dual class shares, where former CEO of Hollinger International, Conrad Black, controlled all of the company's class-B shares, which gave him 30% of the equity and 73% of the voting power. He filled the board of directors with friends, and paid himself huge management fees, consulting payments and personal dividends. Holders of the publicly traded shares were powerless to stop him, and the company suffered under his leadership, eventually going bankrupt.
The situation is even more acute in Singapore, where there is little recourse for retail investors when rogue companies make wanton use of public monies. Investor activism is not strong in Singapore, and we regularly hear of stories of retail investors losing much of their hard-earned savings to companies with poor governance (the point being that the investors possibly could/should have raised the alarm as the company goes in a downward spiral). With poor support for retail investors, companies with malignant intent could easily get away with daylight robbery of the public.
Failure of proposed safeguards
The proposed safeguards are a joke. Having a code of corporate governance sounds like using guidelines to govern citizens' behaviour. The proof of the pudding is in the tasting. There has to be suitable recourse and restitution for people invested in a companies in which they have little voting power. Or better yet, we can avoid the problem to begin with.
Independent directors voted in on a one-share-one-vote basis to keep watch over the company management is not an ideal solution. This is effectively control by proxy. However, when it comes to my money, I would rather control it personally than to hand it over to someone I do not know and have no say over. Moreover, when was the last time you've heard on the news of a director at loggerheads with a company's management?
And unfortunately for us, retail investors in Singapore do not typically keep ourselves well-informed. We have been brought up to trust the authorities, and we keep this mindset when investing. We do not question management intelligibly enough, and are more than happy to stay in the sidelines to avoid conflict. This is unlikely to change when we have DCS-listed companies in SGX.
How will this change affect us? There are generally 3 main parties involved, the founders/management, retail investors, and institutional investors. For institutional investors, this would represent a tremendous loss of voting power for them, and it is likely that they would stay away from DCS-listed companies, at least for the beginning. Therefore, it would appear that these lower-voting shares would be marketed towards the public, and the public would be over-represented in exposures to these new shares. In the most optimistic picture, management would wield their voting power appropriately, companies would grow in the long term, and all would be rosy when institutional investors decide to grab their slice of the pie. However, I am a little more pessimistic about the outcome...
What is your take on DCS in Singapore? Are you supportive of it?
