Companies with multiple classes of common stock should not be able to list on either the New York Stock Exchange and or Nasdaq because of potential shareholder inequity, the Council of Institutional Investors urged Tuesday in letters to the two exchanges.
“These structures are troubling because they pose greater risks to investors and foster less accountability from boards and company insiders,” said Anne Sheehan, council chairwoman and director of corporate governance for the $152.5 billion California State Teachers' Retirement System, West Sacramento.
The group also noticed startup companies opting for the multiclass stock structure. Between January 2010 and March 2012, 20 of 170 initial public offerings offered different classes of stock.
CII officials note that a trend toward greater shareholder rights started to change in 2004 with Google's public offering of two classes of common stock with 10-vote shares and one-vote shares for publicly sold stock. Other multiclass IPOs from Facebook, Groupon, LinkedIn and Zynga offered insider-controlled classes of stock with 10 or more votes per share for some classes.
Ms. Sheehan said in a statement that there is “ample evidence” that multiclass stock companies do not perform as well and are more prone to abuses like excessive CEO pay. A study by the Investor Responsibility Research Center Institute and Institutional Shareholder Services found that only LinkedIn's stock increased in value since its IPO, while Zynga stock price dropped 72%, Groupon's dropped 79.3% and Facebook's fell 52.5%.
CII members, who represent $3 trillion in combined assets, want the exchanges to propose a rule to make companies with two or more classes of common stock with unequal voting rights ineligible for listing, and to prevent newly listed companies from issuing further multiclass stock. They note that multiclass stock companies are largely prohibited on major exchanges in London and Tokyo.
“We don't do this very often, but we've moved to a point where we think the exchanges need to fix this,” Ann Yerger, CII executive director, said in an interview. “We strongly believe that one share, one vote is a core principle for investors,” especially those reliant on passive investment strategies. “We'll keep fighting for this.”