HKEx’s IPO problem

Hong Kong Exchanges and Clearing (HKEx) failed to get the mandate for this summer’s Alibaba listing, signalling the structure of its IPO market could be in need of reform.

The loss of Alibaba rankles. Despite a display of sportsmanship, reading between the lines of how HKEx has taken the loss, the disappointment is clear.

HKEx did not get the mandate because it requires shareholder voting rights to be consistent. Alibaba wants to have a special deal for its founders. HKEx could not accommodate that. 

Oddly in Hong Kong, the fact that the exchange stuck to principles over profits has been applauded. Commentators have said that because Hong Kong minority shareholders do not have the same rights of recourse as US shareholders, a North American market can permit the Alibaba arrangement better than Hong Kong’s market.

Charles Li, the CEO of HKEx, may not write every word of his published blog, but this particular entry appeared to contain his personal frustrations.

He asked if Hong Kong should now compromise its ‘one share, one vote’ principle to secure the listings of powerful companies from China. Should Hong Kong sacrifice one share, one vote for large commercial gains? Should Hong Kong blindly follow the US in its corporate governance structures and destroy the spirit of one share, one vote?

He pointed out that one share, one vote doesn’t permeate Hong Kong, and even in his own firm, the Government gets to nominate half of his directors and appoint the chairman – even though it only holds 5.8% of HKEx’s shares. Presumably a contentious point for the CEO of a listed company.

He mused whether with a newly listed tech company, would one trust its creator or a faceless IPO investor to protect investors better. For example, Steve Jobs of Apple versus a rapacious hedge fund manager?

Hong Kong itself may be deeply undemocratic, but it still functions.

All the points he makes, in as gracious a way as possible, signal a desire to abdicate the moral high ground.

HKEx is in a tricky position, complimented for its stance, it wants to acknowledge that praise, but what it really seems to want is to be pragmatic about its future principles.

“Hong Kong has earned a lot of praise and respect for taking a principled stand, We are all proud and rightly so, but we should not misplace our pride and accept the praise and congratulations we received as an endorsement not to engage in a deeper and tougher debate on how to strengthen our market.”

Reading between the lines that appears to say, ‘principles noted – but let’s make money’?

So, should HKEx be allowed to rewrite the rule book? It won’t be easy. Once you’ve done the right thing, it is hard to do the wrong thing (though it won’t be presented as the ‘wrong thing’, it would be presented as a ‘strategic re-alignment to reflect market trading conditions’).

The pragmatic answer is  – yes it should change the rules. HKEx would have to fend off the brickbats, but Hong Kong’s exchange is a corporation that is profit-driven. It needs to make revenue and warn customers where necessary that they are buying shares in an issuer that wants their money, but not their opinion.

HKEx will shrivel if it only represents domestic companies in the Southeast rump of mainland China. If it needs to adopt a casino mentality over shareholder rights, it is probably one of the lesser risks in investing in mainland shares.