It has been a bad decade for those who believe corporate voting power and economic ownership should go hand in hand.
After Google in 2004 and Facebook in 2012 decided that Silicon Valley couldn’t be restrained by public shareholders, the explosion of a tech sector fuelled by private capital meant that companies with dual-class share structures became more common. Thus a record number of US listings in 2021 handed more votes to founders or certain shareholders, most without the type of time-limited sunset clause that institutional investors prefer.
Markets elsewhere also shifted away from the default rule of one share, one vote. Singapore and Hong Kong allowed dual-class listings from 2018. Even the UK — something of an evangelist for shareholder democracy — softened, allowing restricted dual-class shares with a five-year time limit. Investors, it seemed, had lost the fight against structures that entrench the interests of insiders. But not so fast: another battle is just getting started.
One peculiarity is that the increase in controlled companies has come up against seemingly implacable institutional opposition. The go-go performance of US tech, and a hefty dose of Fomo, meant investors held their nose and bought anyway. But when Institutional Shareholder Services, the voting advisory firm, polled US investors in 2021, 94 per cent supported taking a tougher line on poor governance structures such as unequal voting rights. A similar survey in continental Europe the following year got 75 per cent support.
On the back of this advice, the proxy firm has introduced a policy of recommending against directors at US companies with dual-class structures, axing its previous forbearance for companies listed before 2015. There are minimal exceptions, notably for newly listed companies with no more than a seven-year sunset. Will it make a difference? Intrinsic to this well-trodden debate is that these companies can simply ignore their voting public. But it is, says Krishna Veeraraghavan, partner at Paul Weiss, “another point of pressure”, given board directors’ sensitivity about votes against their work.
The bigger barney, oddly, may be coming in continental Europe. From next year, a new policy will recommend voting against directors at companies with unequal voting rights. By ending the truce on multiple voting structures, the ISS will be in conflict with the established corporate governance culture in many continental European markets, says Marco Becht, professor of finance at the Université Libre de Bruxelles.
Some of Europe believes — rightly or wrongly — that it has good unequal voting aimed at long-term decision-making and responsible stewardship, rather than the nasty American control freakery. This European exceptionalism has some justification: in Sweden, dual-class shares have been a feature of the market for about 100 years. The Confederation of Swedish Enterprise, which last month called the ISS move “concerning”, says that more than 70 per cent of the market capitalisation on the main market has such a structure. Others have been less diplomatic, with Swedish media reporting criticism that the way the ISS intends to enact the policy amounts to “mafia methods”.
ISS cites support from its clients. A group of asset owners led by pensions scheme Railpen last year launched the Investor Coalition for Equal Votes to campaign against dual-class shares.
In Europe, they will be pushing not just against truculent founders or sleepy boards but against policymakers. Since France’s Loi Florange in 2014, loyalty schemes offering extra votes to long-term investors have been introduced in markets like Italy, Belgium and Spain, which will also be caught by the ISS change. The evidence suggests, per the European Corporate Governance Institute, that these don’t increase holding periods and are “almost exclusively used by controlling shareholders”.
But the appeal of loyalty votes in Europe owed something to encouraging listings in markets where family control is the norm. Angst about the vitality of national stock exchanges has prompted further moves to give companies more freedom. Italy’s rightwing League party last month proposed extending differentiated voting rights, after a series of Italian companies including Campari and the Agnelli family’s Exor holding company left for the greater flexibility of the Netherlands. In December, the European Commission suggested rules allowing multiple vote structures to encourage fast-growing small and medium-sized companies to list.
ISS, with its proxy adviser peers, has already come under fire in the US from Republicans waging a culture war against sustainability and social pressures on companies. It may be wandering into similar terrain in Europe.
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