The late Australian journalist Clive James once quipped, “The problem with Australians is not that so many of them are descended from convicts, but that so many of them are descended from prison officers.”
That legacy endures in the form of a patronising paternalism that permeates much of Australian government and society. Nowhere is this more evident than in the regulation of Australia financial services, where a conclave of bureaucrats and private-sector know-it-alls seem to believe it is their life’s mission to protect citizens from themselves.
For a brief golden period, Australia’s financial and capital markets were lightly regulated. That ended in 2001 with the Howard Government’s Financial Services Reform Act which ushered in a new regime of licensing and oversight. From that point forward, the ability of businesses and individuals to freely trade among themselves was diminished. They now needed government permission, who decides what kind of product is traded, what was the nature of the trade, and how the trade was conducted.
The ASX proposal
In a rare break from this mindset, and perhaps in response to suggestions from the authors of this column, the ASX recently announced it would explore the introduction of dual class share structures for listed companies. This move would bring Australia into alignment with global peers and eliminate a long-standing obstacle to listing on the exchange. The ASX remains the only major exchange that prohibits dual-class shares.
Dual-class structures typically involve different classes of shares with unequal voting rights. Common in founder-led companies, they allow management to focus on long-term value creation without being beholden to short-term market pressures.
Several of the world’s largest companies are founder created and led and employ dual-class shares. This includes, Alphabet (Google), Berkshire Hathaway, Meta (Facebook), Dell Technologies, Palantir, AirBnB, and Snap.
The ASX was not always opposed to dual-class shares. In fact, it once accepted expert evidence from Professor Peter Swan in support of News Corporation’s use of non-voting preference shares.
Preference shares have priority over ordinary shares when it comes to dividends, particularly when payouts are reduced or suspended. At the time, every News Corporation shareholder received both a voting and a non-voting share, and the market responded positively. This structure gave investors the flexibility to choose which class of shares to buy or sell. An increase in investor choice that typically supports higher stock valuations.
This arrangement allowed Rupert Murdoch to expand his media empire while retaining control. He was able to issue more preference shares to willing investors and sell some of his own, with preference shares typically trading at a slight discount to their voting counterparts.
Eventually, the government pressured the ASX to prohibit dual-class share structures for other companies. And when News Corporation relocated to New York, dual-class shares effectively disappeared from the ASX.
Will the ASX have more guts this time around?
Now with the proposal to bring back dual-class shares circulating, predictable opposition has surfaced.
Some fund managers and institutional investors, unhappy simply to exercise their right not to invest in such structures want to ensure that no one can. They would rather force every investor to go offshore to gain access to far more dynamic founder-led companies.
These fund managers and institutional investors have argued that dual-class shares give disproportionate power to founders and executives, potentially compromising shareholder rights and corporate governance. Perhaps true, but they always have the option to not invest.
The ASX floated the idea of permitting dual-class structures in 2007 but quickly retreated in the face of similar criticism showing itself to be overly cautious, if not outright risk-averse. When presented with the opportunity to attract innovative, founder-led companies to its board, it consistently chooses inaction, further cementing its slow slide into irrelevance.
And so we return to Clive James’ observation, that Australia is a nation more comfortable regulating behaviour than trusting in freedom. In today’s Australia, even something as simple as choosing which type of share to own is subject to oversight by a new class of financial gatekeepers. Well-intentioned, perhaps, but no less certain than their predecessors that too much freedom is a risk.
Thankfully, these gatekeepers cannot stop Australians from accessing opportunities overseas. In the meantime, the ASX appears almost committed to making itself obsolete, ceding ground to private equity and retreating from its role as a vibrant public marketplace.
Dimitri Burshtein is a principal at Eminence Advisory. Peter Swan AO is emeritus professor of finance at the UNSW Sydney Business School.