Report warns of risks for Asian investors of dual-class shares
Major report highlights risks associated with DCS for Asian investors and gives a historical overview of how such structures have impacted investors in the US
In a newly published report on "Dual-Class Shares: The Good, The Bad, and The Ugly", the CFA Institute identifies key risks for investors and proposes additional investor protection measures which are needed as Asia embraces dual-class shares (DCS).
CFA Institute is the global association of investment professionals that aims to set the standard for professional excellence and credentials.
Their latest report reveals the results of a survey CFA Institute carried out this year of CFA members in Asia Pacific, in which respondents identified three key risks associated with DCS:
- insufficient or absence of minority investor protection (53%)
- skewed proportionality between ownership and control (52%)
- and race to the bottom in terms of corporate governance standards (28%)
Another major concern was that a majority (60%) of respondents had no experience investing in firms with DCS structures, which suggests that all market participants would benefit from further education about DCS and the associated risks. The CFA fear this situation could lead to a race to the bottom as other exchanges, besides Hong and Singapore, in the region contemplate a similar move.
Mary Leung, head of Advocacy, Asia Pacific, CFA institute, comments, "Everyday investors in Asian jurisdictions such as Hong Kong, where class and derivative actions are unavailable, are particularly susceptible to the entrenchment risks of super shareholders created by dual class share structures, and it is difficult for them to protect themselves against such risks without an appropriate regulatory framework."
CFA Institute also urges governments and regulators to establish a mechanism for small investors to seek recourse when faced with rogue companies and management acting in their own self-interest.
Other case studies in the report illustrate common risks associated with DCS structures: entrenchment risk and reduced levels of accountability, often leading to depressed share prices, thus highlighting the importance of having sunset provisions.