Companies going public should have equity structure and governance provisions that protect shareholders’ rights equally, said a new policy adopted Wednesday by the Council of Institutional Investors.
CII members, who represent $3 trillion in collective assets, called for a “one-share, one-vote” structure, simple majority vote requirements, independent board leadership and annual elections for board directors.
In a policy statement, CII said that “a troubling number of companies enter the public markets with structures and practices that fundamentally compromise accountability to shareholders and entrench insiders,” through multiclass equity structures, plurality vote requirements and classified board structures, among other tactics. As newly public companies mature, “special protections for insiders and disparities between economic ownership and voting power become especially problematic.”
The new policy was prompted by investors’ concern about recent U.S. initial public offerings with dual-class structures, including Alibaba, First Data, Groupon, LinkedIn, Square and Zynga. “When a company goes to the capital markets to raise money from the public, investors are entitled to certain protections and basic rights, including a vote that’s proportional to the size of their investment,” said Ken Bertsch, CII executive director, in a statement.
Mr. Bertsch said it is “particularly troubling when companies tapping public markets insulate controlling shareholders forever.” CII urged newly public companies without the protections to adopt them over a reasonable period of time.
Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance, in a statement called dual-class voting structures “shortsighted” for investors who “have no power to make change” when problems arise.
A 10-year Institutional Shareholder Services study commissioned by the Investor Responsibility Research Center Institute found that dual-class controlled companies generally underperformed non-controlled firms, and with longer director tenure, slower board refreshment and less diverse boardrooms.