HKEX’s proposed voting rights rule change detrimental to market integrity, says CFA Institute

Rule changes could deter long-term capital and high-quality issuers


THE proposed rule changes to allow weighted-voting rights (WVR) for Hong Kong-listed stocks will have a detrimental impact on overall market integrity, according to the CFA Institute, the organization which offers the Chartered Financial Analyst (CFA) designation.

The Stock Exchange of Hong Kong (HKEX) is currently consulting market participants on the proposed rule changes. The earliest listing under the WVR structure could be in June, according to Charles Li, chief executive of HKEX Group. The WVR structure would allow companies to issue different classes of shares, granting different weighted voting rights to shareholders. This structure is seen on other exchanges, such as the New York Stock Exchange.

The WVR is “an odd way of attempting to maintain Hong Kong’s competitiveness,” according to Mary Leung, CFA’s head of advocacy for Asia-Pacific. The CFA Institute supports Hong Kong’s long-held “one-share, one-vote” structure.

“A structure that provides one shareholder group with disproportionate votes creates the potential for a minority shareowner to override the wishes of the majority of owners who also have a vested interest. This will only encourage short-termism, deter long-term capital and high-quality issuers, with a detrimental impact on overall market integrity,” says Leung.

Many new economy companies, especially mainland Chinese technology companies such as Alibaba and Xiaomi, are leery of listing in Hong Kong because they want to leverage the WVR structure to protect the control of company founders. Proponents of the rules change argue that the new WVR structure could help encourage new economy companies, such as Xiaomi and Alibaba, to list in Hong Kong. “The market has reached a clear consensus on the way forward in terms of attracting new economy companies to list in Hong Kong,” says Li.

However, with the new rules up for discussion, early this year both Alibaba and Xiaomi expressed interest in listing in Hong Kong, according to local reports. Jack Ma said in January that he “will definitely seriously consider the Hong Kong market”. Xiaomi plans to list in Hong Kong by the end of this year.

But Leung thinks introducing the WVR structure will allow founding shareholders to raise proportionately more funds without giving up control. “As an example, if founding shareholders have five votes for each share they own, they can sell 90% of the company, retain 50% of the votes and still control of the company,” she explains.

Leung suggests raising investor awareness of potential risks on both the valuation of new economy stocks and on investors’ rights. “This is especially needed in a market like Hong Kong where there is significant retail participation in the stock market,” she says.

She also suggests enhancing other corporate governance rules such as raising the minimum number of independent non-executive directors on the board and a mandatory separation of chairman and CEO roles.

Hong Kong is not the only Asian market planning to adopt the WVR structure. Loh Boon Chye, CEO of Singapore Exchange (SGX) said in January that SGX is planning to allow companies with the WVR structure to list.

“Hong Kong and Singapore have in the past done reasonably well in regional corporate governance rankings, being ranked number one and two, respectively, in the 2016 CLSA/ACGA CG Watch. Whether their moves mean ceding their top rankings to Japan and Taiwan (number 3 and 4, respectively) remains to be seen,” says Leung, emphasizing that currently no market in Asia permits the WVR structure.



6 Feb 2018


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