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US bourses can take a leaf from Singapore DCS framework: SEC commissioner

He praises safeguards to mitigate risks; stresses importance of keen oversight to avoid 'race to the bottom'

(From left) Mr Jackson, Mr Shanmugam and Mr Gerald at the launch of the Singapore Corporate Governance Week.


SINGAPORE'S dual-class share (DCS) structure with its attendant safeguards are a sensible compromise that can be an "interesting" model for the US, home to the world's biggest stock markets, said Commissioner of the US Securities and Exchange Commission (SEC) Robert Jackson Jr.

But Mr Jackson warned that the Singapore Exchange and Hong Kong - which adopted DCS ahead of Singapore - must keep close oversight on DCS, because he sees dual-class shares as a race to the bottom in corporate governance. "Without oversight, you'll end up at the bottom - where the US exchanges are."

In the US, DCS companies include Ford Motor and Google parent Alphabet, whose stock is split into different groups to give one class of owners more voting rights than others.

In an exclusive interview with The Business Times, Mr Jackson noted that when SGX in June gave the nod for companies with the controversial share structure to seek a primary listing on its mainboard, it also ensured that there is oversight in place to mitigate corresponding corporate governance risks.

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Mr Jackson said: "The steps they (SGX) took were very sensible middle-ground, allowing dual-class but requiring accountability. And I think that provides an interesting model for the US exchanges."

These steps include an enhanced voting process for certain matters in which all shares carry only one vote each regardless of class - for example, appointment and removal of independent directors and /or auditors, a reverse takeover, a winding-up or a delisting, and a variation of rights attached to any class of shares.

There are also sunset clauses where multiple vote shares will auto-convert to ordinary voting shares under circumstances the company must stipulate at the time of the IPO.

Mr Jackson pointed out that in a DCS structure, non-controlling shareholders have no way to check the majority voting power, and therefore oversight of DCS is extremely important. DCS allows certain shareholders - typically a company's founders or leaders - to retain control of a business via greater voting power.

The SEC commissioner was in town to deliver a keynote address on Monday at the launch of the 9th Singapore Corporate Governance Week organised by Securities Investors Association (Singapore) or SIAS. The event was themed Is Corporate Governance In Step With Business - Help Or Hindrance?

Mr Jackson, who is on public service leave from New York University School of Law, noted that Hong Kong mandates that the DCS structure be limited only to the founder, and once the founder leaves the company or passes on, the system would be back to the one-share one-vote structure.

"Singapore has an even stronger oversight. The listing standard requires that one-share one-vote structure for the independent directors (IDs), so the minority shareholders can continue to elect IDs who can represent them with the management."

In his keynote address, Mr Jackson asked the 200-strong gathering at Mandarin Orchard Hotel: "You might know what the US stock exchange has done so far? Nothing. Nothing."

"And I give a great deal of credit to the Singapore and Hong Kong stock exchanges for taking the concerted steps that they did."

Mr Jackson also cautioned stock exchanges worldwide against "racing to the bottom", in order to attract listings. He later told BT: "I think the fact that exchanges have not done more to limit the use of dual class is a sign of a race to the bottom. The reason is that exchanges' profit motive leads them to permit DCS's use in ways that risk abuse of minority shareholders to attract listings and therefore profits, rather than impose limits on DCS, such as sunsets, that would protect shareholders.

"What I'm trying to do today is to stop the race to the bottom. That's why I said Singapore and Hong Kong must keep close oversight over DCS. Because this may be the first step towards the bottom..."

He shared that investors in the US have for years appealed to the exchanges to take action but failed.

Exasperated, they then approached the companies that make stock indexes. "Those indices took remarkable steps, by agreeing to exclude companies with DCS, going forward."

However, this presents another set of problems for the investors. Mr Jackson explained: "Because ordinary investors, mom-and-pop investors, like my parents, tend to invest in indexes, tend to be invested only in S&P500 or Russell 3000, which means the next big growth story in the US, the next Google, the next Facebook, might be left out of their portfolios, which means the Americans, the investors would be left feeling left out of the most significant growth story in our country."

Earlier at the launch, Law and Home Affairs Minister K Shanmugam in his opening address touched on the SIAS theme.

"Each time something goes wrong, we think it's by putting in more rules, rather than recognising existing rules not being implemented properly.

"All because people inevitably trying to get round the rules, the human weakness. But by adding more and more rules, are you actually suffocating business or are you actually going to encourage business? How do you deal with it? This is a very difficult question."

In his welcome address, SIAS president and chief executive David Gerald urged investors and companies to be prepared for the next financial crisis. He said "...conferences like this are essential as they give decision-makers, regulators, investors and companies the platform to focus on and discuss important issues whilst considering the risks that lie ahead."

Corporate Governance Week 2018 will see over 260 companies and 900 individuals taking part in the various programmes. Notably, there is a charity governance conference to discuss the good practices of fund raising and how organisations can attract, retain and motivate talent in the non-profit sector.

READ MORE: Revised corporate governance code principle-based

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