It’s been a bad decade for those who believe that corporate voting rights and economic ownership should go hand in hand.
After Google in 2004 and Facebook in 2012 decided that Silicon Valley could not be held back by public shareholders, the explosion of a technology sector fueled by private capital has meant that companies with shareholder structures at two classes have become more common. So a record number of registrations in the United States in 2021 granted more votes to founders or certain shareholders, most without the kind of time-limited sunset clause preferred by institutional investors.
Markets elsewhere too quirky of the default rule of one action, one vote. Singapore and Hong Kong allowed dual-class listings from 2018. Even the UK – something of a shareholder democracy evangelist – has mellowed, allowing restricted dual-class shares with a five-year time limit. . Investors, it seemed, had lost the fight against insider-interest structures. But not so fast: another battle has only just begun.
One particularity is that the proliferation of controlled companies comes up against seemingly implacable institutional opposition. The blistering performance of US tech and a heavy dose of Fomo meant that investors held their noses and bought anyway. But when Institutional Shareholder Services, the voting advisory firm, asked American investors in 2021, 94% favored a harder line on poor governance structures such as unequal voting rights. A similar investigation in continental Europe the following year gained 75 percent support.
Based on this opinion, the proxy company has a policy in place to recommend against directors of dual-class U.S. companies, ending its previous forbearance for companies listed before 2015. There are minimal exceptions, including for newly listed companies with a sunset of up to seven years. Will it make a difference? Intrinsic to this well-rehearsed debate, these companies can simply ignore their voting audience. But it is, says Krishna Veeraraghavan, a partner at Paul Weiss, “another pressure point,” given how sensitive directors are about votes against their work.
The bigger barney, oddly enough, could be coming to 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 come into conflict with the culture of corporate governance established in many continental European markets, says Marco Becht, professor of finance at the Free University of Brussels.
A bit of Europe believes – rightly or wrongly – that he has an unequal good vote aimed at long-term decision-making and responsible stewardship, rather than the evil American controlling crackpot. This European exceptionalism has some justification: in Sweden, dual-class shares have been a feature of the market for around 100 years. The Confederation of Swedish Business, which last month called the ISS decision “worrying”, says more than 70% of market capitalization in the main market has such a structure. Others have been less diplomatic, with Swedish media reporting criticism that the way the ISS intends to implement the policy amounts to “mafia methods”.
ISS cites customer support. A group of asset owners led by the Railpen pension scheme launched the Investors Coalition for Equal Votes last year to campaign against dual-class shares.
In Europe, they will push not just against earthy founders or sleepy boards, but against policy makers. From France Florange Law in 2014, loyalty programs offering additional votes to long-term investors were introduced in markets such as Italy, Belgium and Spain, which will also be affected by the change in ISS. The evidence suggests, by the European Institute of Corporate Governancethat these do not increase holding periods and are “almost exclusively used by controlling shareholders”.
But the appeal of loyalty votes in Europe owes something to the encouragement of listings in markets where family control is the norm. Concern over the vitality of national stock exchanges has prompted new measures to give companies more freedom. Italy’s right-wing League party proposed last month to expand differentiated voting rights, after a series of Italian firms, including Campari and the Agnelli family’s holding company Exor, left for greater flexibility. From the Netherlands. In December, the European Commission suggested rules allowing for multiple voting structures to encourage fast-growing small and medium-sized businesses to register.
ISS, with its peer proxy advisors, has already been shot Republicans in the United States waging a culture war against sustainability and corporate social pressures. He may be wandering on similar ground in Europe.