Introducing dual-class share structures to make London a more competitive financial centre would weaken shareholder rights and make it harder to influence corporate behaviour, institutional investors and trade bodies have warned.
- Critics warn dual-class share structures would be bad for investors
- Others advocate a balance to ensure London’s competitiveness post-Brexit
Lord Hill’s UK Listing Review, published on 3 March, set out 15 ways to improve the UK’s position as an international destination for company listings. The report was commissioned by the UK Treasury and proposes introducing dual-class shares to London’s premium listing segment.
This practice is commonplace on other major exchanges but under current rules the UK’s listed market requires a ‘one share, one vote’ structure.
Between 2015 and 2020, London accounted for just 5% of initial public offerings (IPOs) globally, while the number of listed companies in the UK has fallen by 40%, according to Lord Hill’s review.
Advocates of dual-class shares claim the rule change will make London more attractive, particularly to high-growth, innovative companies in the technology sector at a time when the country is losing ground to other financial centres. Following Lord Hill’s proposals, Deliveroo, which has a dual share class structure, announced a plan to list on the London Stock Exchange (LSE).
Critics of the dual-class structure warn it would give more powers to founders, dampen shareholder rights of minority investors, and make it harder for investors to influence corporate behaviour on matters such as climate change.
Dual-class structures carry two different classes of shares with different voting rights, which means founders can keep voting control of the publicly listed company through holding shares with enhanced voting rights compared with the shares held by public shareholders.
George Dallas, policy director of the International Corporate Governance Network (ICGN), a body representing investors globally, is strongly against the proposal. Having considered a range of evidence from academics around the world, the ICGN has concluded that it is not a good governance arrangement.
He says: “The problem is shareholders might hold the vast majority of capital, but if a founder has over 50% control through a dual-class share arrangement, that influence can make it difficult for investors to engage with these companies, and the ability to vote to signal concern is severely diluted.
The UN-backed Principles for Responsible Investment (PRI) is concerned the LSE will potentially join a global ‘race to the bottom’ by allowing differential voting rights.
Head of corporate governance Athanasia Karananou says: “There’s nothing necessarily wrong with a company that has a dual-class share structure, especially in certain sectors or when you have a founder who really wants to execute their vision.
“However, it does come hand in hand with a lot of governance and accountability issues, and then investors need to take a very considered approach as to whether this is a company that they would like to invest in.”
Large institutional investors have previously voiced concern over dual-class structures because of the challenges they pose to executing good stewardship. Sweden’s AP7 successfully sued Facebook in 2017 to block founder and CEO Mark Zuckerberg’s attempt to introduce non-voting shares for minority investors in the social media giant.
In the UK, the £30bn (€35bn) Railways Pension Scheme (Railpen) is also opposed to dual-class shares.
“Limiting a pension fund’s ability to vote not only limits their abilities to protect their own investments against climate and other ESG risks, but restricts the influence they can have on a societal level” - Joe Dabrowski
Railpen’s senior investment manager Caroline Escott says: “We appreciate that the government wants to ensure the UK remains a competitive global marketplace in the wake of Brexit, and that’s good for us as investors as well.
“But we believe that dual-class share structures do run the risk of diluting the ability of long-term investors like Railpen to hold companies to account because they create a wedge between economic ownership and voting control.”
As a responsible investor, Railpen is a supporter of the power of engagement and carefully exercising voting rights in a way that “helps improve corporate behaviour to deliver for our members fundamentally and the ability to vote”, Escott says.
Joe Dabrowski, deputy director for policy at the Pensions and Lifetime Savings Association (PLSA), says while the trade body shares the government’s desire to see a strong and competitive LSE, “weakening investor’s rights” in order to remain competitive would be a “backwards step”, and risks reducing the UK’s strong reputation for high corporate governance standards.
The PLSA says a reduction in standards would be harmful to pension funds and, ultimately, pension savers, and wants the government to retain ‘one share, one vote’ for premium listings.
“Any move away from this would erode the rights of investors to influence companies, and encourages a culture of divestment rather than engagement,” says Dabrowski. “Limiting a pension fund’s ability to vote not only limits their abilities to protect their own investments against climate and other ESG risks, but restricts the influence they can have on a societal level.”
The Hill review has suggested some safeguards to uphold high standards of corporate governance –for example, a mandatory five-year sunset provision. This is unlike some large visible US companies that have permanent dual-class arrangements in place.
Institutional investors such as Railpen have welcomed this provision as well as the inclusion of a cap on the voting rights ratio of 20:1.
ICGN’s Dallas says that even though he says “we shouldn’t be going this route in the first place”, a sunset arrangement “should differentiate the UK positively, relative to other jurisdictions that allow dual-class share structures”.
The PRI’s Karananou adds that “people behave and think differently” when they know that this provision is not going to be there for the duration of the company.
Others argue for balance. William Wright, managing director at think-tank New Financial, says that, while he is philosophically “incredibly sympathetic” to institutional investors’ concerns, a more pragmatic approach is needed to reflect the competitive global landscape.
Many tech companies have taken advantage of dual-class share structures in the US, and more countries around the world are adopting them.
Wright explains that there are certain markets in Europe, such as Sweden, where most of the market capitalisation of the stock market is through dual-class structures.
“What can we do to address those changes, respond to the competitive dynamics of public equity markets around the world, while still ensuring a degree of protection for investors? I think the balance that the Hill Review has come up with is a reasonably sensible one,” Wright says.
Peter Harrison, group CEO of Schroders, which supports the dual-class structure, says: “It is crucial that we do all we can to make the UK the most attractive place for companies to list and to do business for the benefit of investors.”
This balance may be politically necessary to retain London’s post-Brexit competitiveness, but asset owners are clear that it should not come at a cost to good stewardship and corporate governance.