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‘One share, one vote’ remains gold standard despite challenges

John Roe of Institutional Shareholder Services
John Roe said the ‘one share, one vote’ rule has been under attack for some time.

"One share, one vote" remains the bedrock principle for corporate governance aficionados the world over, even as a growing chorus of voices has argued that superior mixes of economic and voting rights for shareholders can lead to greater wealth creation.

" 'One share, one vote' has been a shareholder mantra, but the landscape has changed dramatically" in recent years, said John Roe, managing director and head of analytics at Institutional Shareholder Services, Rockville, Md.

"Since the financial crisis in 2008, there has been (a) resurgence in the promotion and use of differential ownership and control structures in many markets" including the U.S., European Union, China and Brazil, according to a February 2017 paper by the International Corporate Governance Network.

In France, for example, "loyal" long-term shareholders of two to three years can get two votes for every one from shorter-term shareholders; in the U.S., the focus is more on insiders vs. outsiders, with insiders often getting 10 votes to every one for outsiders, Mr. Roe said.

"A very worrying trend," in the U.S. is the increased weight of companies with dual-share classes, now at 12% of the S&P 500 index market capitalization compared with 5% in 2007, said Lynn S. Blake, a Boston-based executive vice president with State Street Global Advisors and the firm's chief investment officer, global equity beta solutions.

Proponents of dual-class share structures cite "short-termism" in financial markets as the driving force behind departures from the 'one share, one vote' standard. Dual-class shares shield management from market forces and shareholder activism too focused on short-term gains, paving the way for long-term value creation, they contend.

Snap Inc., the Los Angeles company that raised corporate governance hackles with its March 2 listing of strictly non-voting shares — a symbolic step beyond the '10 votes for me, one vote for you' share structures of prior high-profile tech listings — struck those notes in its pitch to investors.

Maximize stockholder value

The prospectus for the company behind the Snapchat messaging app said offering no voting rights "will maximize our ability to create stockholder value," by prolonging "our ability to remain a founder-led company."

The Snap prospectus added: "We believe that a significant portion of our success thus far has been attributable to our founders' leadership, creative vision and management abilities. We also believe that our founders' continued leadership in our company will provide substantial future benefits to us and our stockholders."

SSGA's Ms. Blake acknowledged concerns over short-termism and retaining control are real enough, and — by discouraging new listings — a factor behind the fall in the number of public U.S. companies in the Wilshire 5000 to about 3,400 today from a peak of 8,000 in 1998. More companies are opting to remain private longer, she said.

Even so, whether the departure from "one share, one vote" favors management or "tenured" investors, most observers see few advantages and considerable dangers.

A dialogue with shareholders benefits both sides, and companies with dual-class shares that don't see themselves as accountable to shareholders are going to lose that mechanism for feedback, said Karin Halliday, senior manager, corporate governance, with Sydney-based AMP Capital Investors Ltd. She called moves by entrepreneurs to entrench themselves and retain a degree of control of their companies after listing that exceeds their economic interests "self-serving."

Anne-Maree O'Connor, head of responsible investment with the NZ$34.98 billion ($26.2 billion) New Zealand Superannuation Fund, Auckland, said while she understands why tech entrepreneurs would want to insulate themselves from the "tyranny of quarterly earnings," there's no evidence companies using dual-class shares to do so have delivered superior long term value.

Aside from a few standouts, such as Berkshire Hathaway Inc., the performance of companies with dual-class shares has been "very, very mixed," said David A. Smith, Singapore-based head of corporate governance, Asia, with Aberdeen Asset Management. There's little evidence of any hasty proclivity of investors to "defenestrate CEOs" and more to suggest company managements are given too much leeway, he said.

Generally speaking, good management teams don't need to be insulated from their shareholders, he added.

Ms. O'Connor said tech firms in particular can have short life cycles, and if management is failing to meet the needed pace of innovation, then shareholders — with votes equal to their economic interests — should be able to challenge management and promote change.

More supportive

Meanwhile, some industry veterans contend institutional investors are becoming increasingly supportive of managements that take the long view.

The growing ranks of institutional investors with "long-term oriented philosophies" — a "huge change" for the industry in recent years — is making it easier for companies that are "well-managed, governed, supervised, with clear strategies" to sidestep short-term pressures, said Michael Herskovich, head of corporate governance in the SRI/ESG research team at BNP Paribas Asset Management, Paris.

Mr. Herskovich likewise dismissed the experiments in countries such as France and Italy to give long-term investors extra voting rights as unsuccessful, in part because of operational difficulties which have made those systems overly complex and costly.

The idea of "tenured voting rights is appealing in theory" but there are practical as well as philosophical sticking points, said Jenn-Hui Tan, director of corporate finance, Asia-Pacific ex-Japan, with Fidelity International, Singapore.

For example, "people with the most interesting things to say in terms of governance aren't necessarily the people who have held the shares the longest … and you could end up inadvertently entrenching the shareholders who are either closest to management or are management themselves," he said.

Meanwhile market players welcomed a July 26 decision by London-based index provider FTSE Russell to effectively exclude Snap Inc. from its benchmark indexes by insisting that 5% of a company's voting rights be in the hands of minority shareholders to be eligible for inclusion.

New Zealand Super's Ms. O'Connor applauded the move, saying companies with structures like Snap's — leaving shareholders with no voting rights — have no place in benchmark equity indexes.