Dual-class share structures can ultimately impact outcomes for beneficiaries and should be phased out, an investor coalition representing $2.5 trillion in assets said.
Companies with dual-class share structures have issued two or more share classes, with each carrying different voting rights. Share classes with more voting rights tend to be offered to company insiders, while limited voting rights are generally offered for public purchase.
A report by the Investor Coalition for Equal Votes, which is chaired by Railpen, London, and the Council of Institutional Investors, said that dual-class share structures, or unequal voting rights, do not deliver financial advantages over the long term, allow for unjustified privileges to company insiders and protect management and boards from the views of independent investors.
In order to minimize the risk of harm to beneficiaries, the report recommended that these structures be phased out in various ways depending on the type of company and market participant.
Companies, for example, should adopt single-class share structures at the point of listing or as soon as possible after. Investors, the report said, should publicly oppose these structures and use all stewardship tools they can to urge companies with dual-class structures to restore equal voting rights. Stock exchanges should adopt listing standards and methodologies that discourage dual-class share structures, and policymakers and regulators should take steps to discourage such structures, unless certain investor protections are also put in place.
The report details research conducted by ICEV and Chronos Sustainability, which was promoted by the increase in the number and proportion of initial public offerings that have dual-class share structures. More than 40% of U.S. tech IPOs used dual-class structures between 2020 and 2022, while 20% of U.S. non-tech IPOs used the structures. The report said these proportions "are significantly larger than the historic averages," citing ISS data showing that 7% of U.S. companies in the Russell 3000 Index had dual- or multiple-class share structures in 2019.
"The right to vote is arguably the most important of all shareholder rights," said Caroline Escott, chair of ICEV and senior investment manager at Railpen, in a news release accompanying the report. "Dual-class share structures undermine those rights and remove a key accountability mechanism for poorly performing management, making it harder for shareholders to be effective stewards of the companies they own."
The report highlights a number of high-profile cases where such structures "have enabled privileged insiders to manipulate voting outcomes to their own benefit, to the detriment of investors and, ultimately, the beneficiaries whose interests we serve. Instead of taking steps to increase the risk to pension and retail savers by rolling back a vital investor protection, it is crucial that policymakers, and market participants, consider the impact of unequal voting rights from the perspective of both companies and investors alike."
While the report calls for the phasing out of dual-class structures, which it said will take time, it also recognized that there may be some benefits to the structures in the very early stages of a company's existence after an IPO, so it also provides recommendations for key market participants over the near to medium term.
The coalition also called for sunset clauses and robust investor protections for companies looking to list with dual-class structures going forward, or for those with such structures already in place.
Railpen is the in-house manager of the £34 billion ($42.4 billion) Railways Pension Scheme, London. Other investors in the coalition include the £33 billion National Employment Savings Trust, London, and the Florida State Board of Administration, Tallahassee, which oversees $241.4 billion in state assets.
