SINGAPORE (July 2): At Facebook’s AGM on May 31, its CEO Mark Zuckerberg was called upon to defend the company’s dual-class share structure. Zuckerberg is among several Facebook insiders who hold Class B shares, which give the holders 10 votes per share.

Thanks to these powerful Class B shares, Zuckerberg effectively controls nearly 60% of the voting power at Facebook. Unsurprisingly, shareholder proposals at the meeting for a fairer voting structure, greater transparency on gender bias in remuneration and a board committee to assess and monitor risks were all voted down.

But Zuckerberg probably has not heard the last of shareholders’ concerns on its business model, privacy safeguards and corporate governance. Facebook is facing increasing scrutiny following the revelation that Cambridge Analytica, a recently defunct political consultancy, was able to extract data on Facebook users without their explicit permissions. A group of shareholders reportedly wants Zuckerberg to step down from his position as the company’s chairman.

In fact, there is growing pushback against ­dual-class shares. Index provider MSCI is currently holding a consultation on the treatment of unequal voting structures in the MSCI equity indices. It has invited feedback from market participants by Sept 28 and will announce the results of the consultation by Oct 31. Among institutional investors that want companies such as Facebook and Alphabet to have lower weightings based on their unequal voting structures are Legal & General Investment Management and Allianz Global Investors.

The dissatisfaction comes as more founders are choosing to take their companies public while retaining significant control. An article in The Wall Street Journal reported that two-thirds of US start-ups with venture capital investors that were listed last year had a multiple-class structure.

Against this backdrop, the Singapore Exchange on June 26 opened its doors to dual-class shares. “SGX today joins global exchanges in Canada, Europe and the US, where companies led by founder-entrepreneurs who require funding for a rapid ramp-up of the business while retaining the ability to execute on a long-term strategy are able to list,” says SGX CEO Loh Boon Chye in a statement. “Investors who understand and agree with the business model and management of [dual-class share] companies will also have more choice.”

There is competition among bourses to attract Asia’s next Facebook. Hong Kong Exchanges and Clearing recently introduced a framework for listing a weighted voting rights structure company. Chinese electronics giant Xiaomi will be the first to go public under this new framework on the HKEx on July 9, targeting to raise US$6.1 billion ($8.3 billion).

SGX has taken its time introducing a dual-class share framework. It held two rounds of consultations with market participants on the necessary safeguards to protect investors. It has also introduced an enhanced voting process under which all shares carry one vote regardless of class. This process must be used for the appointment and removal of independent directors or auditors; the variation of rights attached to any class of shares; a reverse takeover; and a winding-up or a delisting. Independent directors are also required to form the majority of the audit, nominating and remuneration committees, as well as take the chairs of those committees. Multiple voting shares are capped at 10 votes a share, and can only be held by named individuals or permitted holder groups whose scopes must be specified at IPO. Sunset clauses to auto-convert multiple voting shares to ordinary voting shares must also be stipulated at the time of the IPO.

“SGX’s framework for dual-class share structures strikes a balance between supporting high-growth companies and having in place safeguards to mitigate governance risks associated with such structures,” says a spokesperson for the Monetary Authority of Singapore.

But SGX might be turning up late to a party that is already winding down. Retail investors’ response to Xiaomi’s IPO has been underwhelming.

Strong demand for the stock of fast-growing internet or tech firms has allowed their founders to dictate IPO terms. However, some industry observers say the prices of these companies are greatly inflated. It would take just a few big earnings disappointments for the tech bubble to burst. When that happens, investors are likely to demand greater oversight of founders and entrepreneurs.

SGX’s caution in introducing the dual-class structure here is not unwarranted, given the corporate governance scandals that investors have seen over the years.

But it is also worth considering what the costs of that caution are. In the case of dual-class structures, it may or may not have cost Singapore a hot tech listing. And what of the other industries where the country has been slow to adopt regulation that favours technology and innovation?

Singapore has enacted regulation for the ride-sharing and home-sharing industries. While the rules allow such companies to operate locally, they do not quite embrace the revolution that their business models offer. The country has also been slow to embrace the innovation offered by electric vehicle and autonomous vehicle makers. And it continues to lag when it comes to regulation that promotes cashless transactions.

As entrepreneurs would say, regulation tends to follow innovation. Singapore’s tiny area and population means limited attraction as a market. But, coupled with excellent infrastructure, it also makes the city state a fitting test-bed for new ideas. And, we have the ability to constantly refine the rules, so that capital can be enticed to take risks and yet feel protected. If entrepreneurs are moving quickly, regulators here have to keep pace.

Mood souring on dual-class shares as SGX gives green light

Qarbotech named winner of inaugural EQT Impact Challenge

MSCI boss warns of climate risks

Keppel to acquire 50% stake in European asset manager Aermont Capital for up to $517 mil

Local banks 'resilient' in 2023, but MAS warns of deteriorating asset quality, climate transition risks

The new kings and queens of content

Mood souring on dual-class shares as SGX gives green light

Related News

Highlights

Qarbotech named winner of inaugural EQT Impact Challenge

Related News

The productivity remedy

Winter has come

Why Is China cracking down on ride-hailing giant Didi?