There has been a lot said and written about investor protection, share structures and voting rights in Hong Kong in recent weeks. I’ve been listening with great interest. The advocates of certain points of view are extremely loud, while some quieter voices are nonetheless trying to be heard as well. Whenever I try to focus on the issues I can’t get the voices out of my head.
The other night I was trying to sleep, and as I dozed off I kept hearing these voices arguing endlessly. This is how my dream went.
The first voice I hear is that of Mr Tradition. He has prospered with the market system we have in Hong Kong, and he doesn’t see the need to change. "Hong Kong’s system has worked extremely well for a long time," he says, "so why change it now? Our reputation for investor protection is what makes our market so successful. We have clear rules in Hong Kong and they apply to any company that wants to list. We are continually ranked as one of the top financial centres in the world and were first in IPOs only recently. We clearly don’t have any problems attracting issuers and we have not made exceptions for anyone. If it isn’t broken, why fix it?" And Mr Tradition sits down heavily, shaking his head.
Now Mr Innovation bursts in. He’s a young man with spikey hair; he talks fast and excitedly. "Give us a break, Mr T! What’s wrong with different share structures? Most other exchanges in the world permit them, it’s just you Hong Kong stick-in-the-muds who can’t accept change. Look at the technology companies listing in the US – most of the biggest ones, like Google and Facebook, protect the founder’s position with special voting rights. People invest in these companies based on the founder’s vision, track record and reputation. The founder has the long-term interest of the company in mind, and that’s better than a bunch of hedge funds arbitraging the shares or corporate raiders buying into companies thinking they know how to run them! Look at what happened to Apple! Steve Jobs got kicked out of the company on perfect corporate governance processes but Apple almost went bust before Jobs was asked to come back – and then he recreated one of the greatest companies on earth!"
Mr Innovation is out of breath, but now Mr Disclosure speaks up in a steadier tone. "Calm down, Mr Innovation. The issue is not who is better, innovative founders or activist investors. It is about disclosure. The regulator’s job is to ensure full and fair disclosure and to penalise abuses in disclosure. Don’t forget, investors will simply price these companies at a discount to reflect the less-than-equal voting rights of their shares. Let the market decide what the right price is when founders ask for a special voting structure. This system works well in the US and elsewhere, and certainly isn’t destroying value or ignoring investor protection. It’s time for the Hong Kong market to modernise.”
"I do want to point out, though," Mr. Disclosure continues, "that the disclosure regime works well in the US largely because of the large sophisticated institutional investor base there and the aggressive litigious culture of class actions. As such, the US system provides important deterrent forces that can offset the negative impact of the different weight in share rights. Hong Kong must get comfortable that there will be enough checks and balances to keep the founders motivated, but at the same time, honest and prudent should Hong Kong consider similar changes. If you ask me, a more gradual approach is better than a wholesale adoption of the US system."
"Wait a minute," I hear another voice. "You guys keep talking about protecting investors. Did anyone actually speak to our investors to find out what they really want?" "Great idea!" everyone agreed. They first brought in Mr Big Investor. He said, "I don’t care too much whether a company is listed in Hong Kong or New York since I can invest anywhere. I only care whether it’s a good company. I don’t like disproportionate voting rights, but if you must have them, I know how to value them." Then Mrs Small Investor comes in; she feels really torn: "I can’t invest in the US market, so if it is a great company, don’t take that opportunity away from me, please! But I really don’t like companies with special rights. It isn’t fair. I want the regulators to look after my interests."
Then I hear another voice. It’s Mrs Practical. "Boys and girls!" she says, "Let’s get real! People in Hong Kong have always taken a practical approach and made bold moves. We took a chance on H shares and Red Chips – we even took a chance on private enterprises – and we have been very successful. Let’s just get on with it. If we miss out on the next wave of big listings from China, just think what we’re all going to lose! It’s not just the stock exchange and the SFC losing their trading fees and levies, the government will lose its stamp duty, the brokers will lose hundreds of millions in commissions, and the investing public will lose the opportunity to invest billions of dollars in fast-growing and iconic companies! Hong Kong can’t afford to miss out on all of that!"
Oh dear, somebody doesn’t like this at all! It’s Mr Righteous – clearly agitated now that money has been mentioned. "What do you mean, you, you….!" His voice was rising. "It’s perfectly simple – one share, one vote and that’s the end of it! How dare you suggest the founder is so special! The founder grows old, don’t forget – would you let him entrench himself and extract benefits from the company forever? Would you sell Hong Kong’s soul just to win one or two big listings? What about our hard-won reputation? Why should we learn from the Americans? Look at what they did to the world in the financial crisis with the so-called financial innovation of Wall Street. If anyone doesn’t like what we’ve got in Hong Kong, they should just pack up and leave..." "And one more thing," Mr Righteous continues: "Why is the Exchange even considering this? Is it because the Chinese government asked them to?"
I can feel people becoming really uncomfortable, but no one wants to disagree openly with Mr Righteous, because, well, he is always so righteous. But Ms Future, who has been listening to her music all along, takes off her earphones. "Don’t make it personal," she says to Mr Righteous. "The world is changing, China is changing and so should Hong Kong," Ms Future goes on. "Hong Kong missed the technology revolution a decade ago. Looking into the future, there’s a wave of new economy companies, particularly in the internet space, that may fundamentally reshape the entire economic landscape of China over the next decade. This could be Hong Kong’s chance to claim true global leadership: combining China with technology and the new economy. It's OK for you" she looks pointedly at Mr Righteous, "you’ve already made it, but think about my generation in Hong Kong."
"But why does this future of yours have to have special rights for founders?" Mr Righteous objects.
"If the only way to secure the listing of these companies is to allow special rights for founders, so be it," Ms Future retorts. "You have no right to deny us the opportunity. These innovative companies are growing so fast they are threatening - and could possibly overtake - the traditional businesses which are listed on our exchange. Do we want to pass on these companies, and plant our flag firmly in the past?"
Ms Future is clearly getting annoyed. By this time, I have already begun to sweat in my dream…
"OK, guys, let’s not get carried away!" I hear that familiar voice calling for calm. Thank goodness, it’s Mr Process, finally speaking with that very deliberate manner he is known for. "The issue is not about who is right and who is wrong." Mr Process goes on, "the issue is not whether a particular share structure is good or bad for the markets. The issue is not about who can create or destroy value, founders or activist hedge funds. People can make a case for both sides and many sides. The issue is not about whether Hong Kong should embrace tomorrow or stay in yesterday. We all want to be part of tomorrow."
By now, everyone has sat down to listen to Mr Process more carefully. "It is all about due process." he says. "Hong Kong’s Listing Rules are clear and, if there is a need to change them, we should do it via due process. If we chop and change our regulations to fit whoever comes along we will lose all credibility. What is due process? Well, it means that if a company is asking for something narrow, modest and balanced that can be reasonably dealt with within the letter or the spirit of the overall listing regime as it currently stands, waivers or permissions can be allowed. That is what the Listing Committee and the SFC do all the time. We should also consider whether any discretion we exercise can be articulated clearly as a precedent. This is important because Hong Kong adheres to the rule of law and the regulators need to draw a clear line for future listing applicants seeking similar treatment to follow and carefully articulate a clear rationale for that line."
"If what is asked for is beyond this narrow space of discretion permitted under the rules, however," Mr Process continues, "then such significant changes to the rules and policies should be adopted only after proper consultation with the community so that they will stand the test of time."
Well, where does this leave us then? I was asking in my dream. "Why don’t we call Mr Solution?" someone suggested. "Great idea," everyone agreed.
And then I woke up!
In real life, there isn’t a Mr Solution who can put the right decision together for us. We have to make the decision ourselves, drawing on the wisdom of the community as a whole. We need to look objectively at the issues and not be swayed by emotional arguments or be distracted by specific circumstances of any given company or issue. In the end, we should take responsibility for doing what is right and best for Hong Kong, not just what is safe and easy.
I went back to my office, completely awake from my dream, and began finishing up my blog. I then began to hear another voice in my head, a very clear voice: "Charles, people are already complaining that HKEx has a 'vested financial interest' in this debate. I know you think that such criticism is totally unfounded, but isn’t it a good idea to stay out of the controversy and be silent?" I reflected on this carefully and decided still to proceed with the blog mainly for the following three reasons:
Firstly, yes, I am the Chief Executive of HKEx and part of my job is to promote and protect the interests of HKEx’s shareholders. However, as enshrined in our charter, in the event of a conflict, public interest is put ahead of shareholder interest at HKEx. It is in this context of the broader public interest of Hong Kong that I chose to make my contribution to this important debate;
Secondly, decisions in relation to individual companies or broader policy are not decisions of mine or indeed that of the board of HKEx. They are determined by the Listing Committee, on which I am a small voice, and ultimately by the SFC. The Listing Committee consists of members who are among the best and brightest minds in Hong Kong’s financial community. They devote their vast experience, wisdom and an incredible amount of time to public service. Their decision process and the SFC oversight are motivated and driven by consideration of the best interests of Hong Kong;
Finally, I am not using my blog to change any minds or advocate any particular position. I am simply trying to promote an honest, balanced and respectful debate on an important issue of public interest. Nobody should be made to feel shy, guilty or afraid about expressing their views whether he or she is an individual investor or the Chief Executive of a large institution like HKEx, as long as we all do so with honesty, openness and the best interests of Hong Kong in our hearts.