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ICGN: 'Investors faced with regulatory schizophrenia on governance'

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High corporate governance standards and shareholders’ rights are under threat from a race to the bottom by regulators and stock exchanges, the executive director of the International Corporate Governance Network (ICGN) has argued.

In a comment on the organisation’s website, Kerrie Waring said the principle of ’one share, one vote’ was under attack. ICGN is an investor-led organisation seeking to promote effective standards of corporate governance and investor stewardship; several major pension investors, like France’s Fonds de Réserve pour les Retraites and Ontario Teachers’ Pension Plan, are represented on its board. 

According to Waring, a growing number of companies were seeking to adopt multi-class share structures at the same time as stock exchanges and regulators were showing signs of being willing to accommodate companies with such share structures.

She cited as an example last year’s initial public offering by the owner of Snapchat, a popular mobile app, which listed in the US only non-voting shares. She also pointed to the Singapore Stock Exchange last month issuing a clarification that companies with dual class structures who have a primary listing in developed markets are able to have a secondary listing in Singapore.  

In the UK, meanwhile, the Financial Conduct Authority has launched a consultation on a new premium listing category for sovereign-controlled countries, a move that has worried investors. Many suspect it was linked to plans by Saudi Aramco, Saudi Arabia’s state-owned oil company, to list on an exchange.

Hong Kong Exchanges and Clearing was also mulling changes that would involve lowering governance standards and weakening investor protections, Waring noted.

Norway’s €824bn sovereign wealth fund recently criticised the Hong Kong plan.

It was ironic, said Waring, that the threat to shareholder rights was coming at the same time as politicians and regulators were putting pressure on investors to do more to monitor and engage with boards to safeguard the value of underlying investments and protect shareholders’ and stakeholders’ interests.

This was “regulatory schizophrenia of the worst kind”, she said.

“Demanding investors do more to hold boards account while removing the most important means by which they can do so is setting them up to fail.”

Investors needed to challenge this trend, according to Waring.

One step they should take is to encourage global index providers to take more responsibility by excluding companies with lower governance standards, she said.

Earlier this summer S&P Dow Jones announced it would exclude companies with multiple share classes from key benchmarks. FTSE Russell had shortly before announced it would exclude from its developed market benchmarks companies where 5% or less of the voting rights were in the hands of unrestricted shareholders. MSCI just finished a consultation on the treatment of non-voting shares.

Waring said the ICGN encouraged regulators, stock exchanges and indices to pursue a “race to the top”.

“The alternative,” she said, “is a decline in governance standards and a lack of effective oversight, which will leave markets ripe for another corporate failure at the expense of the investing public – pensioners, retail savers, insurance premium holders and society as a whole.” 

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