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Hong Kong has tried just about everything to attract technology companies. It has incubators and accelerators, hubs and clusters, a Cyberport and an InnoCentre. The government has even established a lavish fund to invest in cutting-edge companies. Yet all this has produced nearly no startups of note. Don’t expect its latest idea to fare much better.
Hong Kong’s securities regulator is considering a pilot project to allow startups with multi-class shares to raise capital on its main stock exchange. Such arrangements, which are currently prohibited, give founders or other favored investors more voting rights than ordinary shareholders. Other cities, notably London and Singapore, are mulling similar proposals.
Tech companies think this will free their founders to realize their prophetic visions. But plenty of research suggests otherwise. One study found that companies with multi-class structures significantly underperformed more traditional ones over the course of a decade, while also tending to have weaker accounting controls. Another found that such companies tend to have weaker sales growth and investment, relative to those that require insiders to pay for the privilege of control. Yet another suggests that what benefits they may have — in terms of leadership or longer-term thinking — tend to recede over time, while potential costs rise.
More to the point, the stated goal of this reform is to attract more “new economy” listings in Hong Kong. But there’s no evidence that weakening corporate governance would actually do so. In the US, where such arrangements are legal, only about 5 percent of listed technology and biotech stocks take advantage of them. Hong Kong, meanwhile, is luring plenty of notable tech listings of its own, even with restrictive rules in place.
You might argue, as a matter of principle, that investors should be free to buy shares in firms with a variety of governance schemes, and that poor management should simply be reflected in stock prices. But this only makes sense with investor protections in place. And one prudent remedy — class-action lawsuits — isn’t available in Hong Kong, which helps explain why a wide range of investors opposes reform.
The fact is, no one really knows what works to attract “new economy” companies, whether to list their shares or to set up shop. They’ve taken root in some unlikely places, while failing to in many more obvious ones. Weakening regulation — or spending tax dollars — in pursuit of them is irresponsible in the absence of better evidence. In fact, more governments should try one thing Hong Kong hasn’t: Leave well enough alone.
—Bloomberg