The Investor Coalition for Equal Votes (ICEV), chaired by Railpen and the Council of Institutional Investors, has called for the phase out of unequal rights, also known as dual-class share structures, which it said are harmful to beneficiaries.
The coalition, which includes investors with around $2.5trn in total assets, found that unequal voting rights do not deliver financial advantages over the long-term, confer unjustified privileges to company insiders, and insulate managements and boards from the views of independent investors, which it said can ultimately impact outcomes for beneficiaries.
To minimise the risk of harm to beneficiaries, in a report published this week, the ICEV makes recommendations to support the phase out of dual-class share structures. These asks are tailored to different financial market participants, including companies looking towards initial public offerings (IPOs), company advisers, fellow investors, stock exchanges and index providers, as well as policymakers and regulators.
Its recommendations for companies include adopting single-class share structures at IPO or soon after, as well as adopting explicit time-based sunset clauses for any dual-class share structures of no more than seven years from the date of public listing at which time the company reverts to a single share class.
It said that if sunset clauses are not adopted, companies should adopt provisions that require periodic approval, at least every seven years, from a majority of each share class voting separately, for the dual-class share structure to continue.
In addition, companies should adopt supplement safeguards for pivotal proposals, it added.
For investors, it recommends that they publicly oppose dual-class share structure and adopt formal advocacy, engagement and voting policy decisions to that effect and work with the market to adopt policy measures to discourage the adoption of these structures.
Investors should also engage pre-IPO companies and their advisers to explain the benefits of equal voting rights and use all stewardship tools to urge companies with dual-class structures to explore the benefits of recapitalisation to restore equal voting rights.
It added that policymakers and regulators should recognise the evidence on the negative impacts of dual-class share structures and take steps to discourage companies from listing with these structures, unless it is with a sunset clause and includes robust investor protections.
Policymakers and regulators should also take interim steps, in advance of more comprehensive market reforms, towards enhancing transparency from companies that list with dual-class share structures.
The right to vote
ICEV’s research, undertaken in partnership with Chronos Sustainability, was prompted by a significant increase in the number and proportion of IPOs that have dual-class share structures.
Between 2020 and 2022, over 40% of US tech IPOs used the structures and 20% of US non-tech IPOs – significantly higher levels than historic averages. The report is also published at a time when UK policymakers have proposed weakening the current restrictions on dual-class share structures for companies listing on a new single segment regime in the UK.
Caroline Escott, chair of ICEV and senior investment manager at Railpen, said the right to vote is “arguably” the most important of all shareholder rights.
She added that 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.
“Our report highlights several high-profile cases where dual-class share 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 servem” she said.
“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,” Escott noted.
Glenn Davis, ICEV vice-chair and deputy director of the Council of Institutional Investors, added that the boards’ accountability to companies’ owners is the “bedrock” of high-functioning capital markets.
“While this principle holds true for the vast majority of public companies, investors are increasingly focused on the minority of where founders’ voting rights are vastly disproportionate to their equity stake,” he said, adding: “This paper highlights reasonable long-term solutions that companies, policymakers and intermediaries are considering.”
Rory Sullivan, chief executive officer of Chronos Sustainability, said: “The evidence on the financial performance of dual-class shares is clear. Any premium to share price at the IPO tends to be eroded over time. The research suggests that, even at innovative companies where multi-class structures command a value premium at the time of the IPO, the premium dissipates within a few years before turning negative.”
Sullivan added that policymakers need to be aware of the implications of permitting dual-class shares. He said that because their effect is to limit the influence that long-term investors can exert, the widespread adoption of such structures in a market may limit investors’ ability to engage effectively with these companies, and may limit the willingness of long-term investors to invest in such companies.