Published October 9, 2009

Will dual-class shares work in S'pore?

By MICHELLE QUAH

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SINGAPORE Exchange (SGX) chief Hsieh Fu Hua has proposed three ideas to improve the level of corporate governance here: introducing dual-class shares; having better redress for shareholders; and an independent body certifying governance standards at companies.

But will these ideas work in a market like Singapore's? Will they improve governance standards - or take them a few notches down?

Mr Hsieh, who proposed these ideas at a regional corporate governance seminar on Wednesday, believes these suggestions would be appropriate to the Asian marketplace and the Asian model of corporate governance.

He believes dual-class shares would be particularly appropriate for Asian SMEs, which are typically family-run businesses or managed by the original founders of the company.

Such 'concentrated' public companies, as he called them, differ from the 'dispersed' public companies typically seen in the West - where ownership is widely held by many shareholders. In 'concentrated' companies, there is a dichotomy between the interests of the owners and those of the less substantial shareholders who are interested only in short-term gains.

Mr Hsieh suggested dual-class shares (a practice in the US and Europe) where the two classes of shares have differing rights. For example, Berkshire Hathaway has Class A and Class B shares. Class B shares, priced at 1/30th of a Class A share, have only 1/200th the voting right of a Class A share.

Adapted to the Asian context, Mr Hsieh believes the class of shares with the greater voting rights could be taken up by shareholders who wish to be more involved in the company (for example, the owners and managers), while the class of shares with fewer voting rights could be taken up by those who wish to merely partake in the economic benefits.

The idea is a good one in that it further empowers the shareholders who have the long-term interests of the company at heart, instead of the shareholders who are more interested in the short-term benefits.

The problem with this suggestion, however, is also precisely that: that it concentrates power in the hands of the original owners and further entrenches them.

The main criticism of family-run companies, so prevalent in Asia, has been that - while ostensibly public - most of these enterprises continue to be run like family businesses, where the interests, opinions and directives of the owners reign supreme, often to the detriment of other shareholders. Owner-managers - even those belabouring under the impression that their intentions are good - may not always make the best decisions for the company. Further entrenching management would, naturally, exacerbate the problem.

Mr Hsieh believes this problem can be circumvented, or managed, by strengthening the board of directors - for example, through majority representation of independent directors (IDs) on the board.

In theory, such a suggestion would ensure that the interests of all shareholders are well represented and protected. But, in practice, things could be quite different. Singapore is already struggling with some issues involving IDs - criticisms here have ranged from there being too small a pool of IDs, to IDs who are not truly independent, to IDs who find it difficult to go up against very dominant shareholders.

Such issues will need to be recognised and addressed before considering the implementation of dual- class shares.

Mr Hsieh also suggested setting up an industry accreditation body which would issue a seal of approval akin to ISO standards. Companies can seek independent accreditation of their corporate governance processes and framework - so that shareholders can distinguish between those with higher and lower levels of governance.

Mr Hsieh said the attraction of this idea is that it would be self-regulatory and voluntary.

That could, however, also be its chief weakness. Self-regulation has not exactly worked to perfection in Singapore - and the Code of Corporate Governance is a prime example. The Code is a voluntary one: companies are encouraged to follow it, but not compelled to. What has resulted is that it's the large, well-established companies that have worked hard to adhere to the Code, while many of the smaller companies have contented themselves with merely paying lip service to the Code - ticking the boxes, without truly adhering to the spirit of the Code - or not bothering to comply with the Code at all.

The accreditation body could suffer the same fate. It's very likely that it will once again be the large, well-established companies that will seek the accreditation - and work hard to earn it - while many of the smaller companies (and precisely those that need to assure shareholders of their level of governance) that will shy away from it.

Companies will most likely need to be incentivised to get themselves accredited. Perhaps lower listing fees for those with better ratings will need to be handed out.

The accreditation process will also need to be strict - and standards need to be high and independently set - for it to have any credence.

No doubt, Mr Hsieh's ideas are laudable and worth considering, but thought also needs to be invested in how to make them truly work.