Rethinking “One Share, One Vote”

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday April 19, 2013 at 12:27 pm
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Editor’s Note: Simon C.Y. Wong is a partner at Governance for Owners, an adjunct professor of law at the Northwestern University School of Law, and a visiting fellow at the London School of Economics and Political Science.

“One-share, one-vote,” a bedrock principle of Anglo-Saxon corporate governance, is back in the spotlight. Except this time the aim is to diminish its application rather than to extend its global footprint. Rising short-termism among investors — which threatens to destabilize both companies and the wider economy — is prompting a reconsideration of the principle that all shareholders should have equal say.

Prominent commentators such as former U.S. Vice President Al Gore, McKinsey Managing Director Dominic Barton and blog, and Vanguard Group founder John Bogle have advocated bolstering the voting rights of long-term shareholders or, conversely, withholding them from short-term investors. Significantly, the Financial Times reported last week that the European Commission was preparing a proposal to give “loyal” shareholders extra voting influence.

Seeking insulation from near-term pressures, Facebook, LinkedIn, Groupon, and other Silicon Valley outfits went public in recent years with dual-class shares that gave their founders — believed to be the most committed to their long-term success — voting power of up to 150 times greater than those accorded outside investors. Google, which adopted a similar share structure at the time of its initial public offering in 2004, has gone further with its decision last spring to issue non-voting stock.

That respected commentators and policymakers are proposing apportioning voting rights unequally among ordinary shareholders — and high-profile companies have, in practice, been doing it — is remarkable. Since the early 1990s, when corporate governance began its rise to prominence, one share, one vote has been perceived as the gold standard. Even countries where dual-class shares are prevalent have sought to narrow the “power distance” created by such structures. Sweden, for instance, amended its company law in 2004 to reduce the permitted disparity of voting rights from 1,000 to one to a maximum of 10 to one.

Furthermore, academic studies have found that allowing shareholders to accumulate voting power that is disproportionate to their economic stake can lead to abuse, particularly in countries where the protections for minority shareholders are weak.

To what extent should discrimination among shareholders be countenanced? Here are five suggestions:

1. For reasons of fairness and to avoid entrenching control, “enhanced voting rights” — which may take the form of additional votes, bonus shares, a separate share class with superior voting rights, and related instruments — should not be distributed only to company founders and other insiders.

Rather, all investors should be eligible to receive them if they meet the qualifying conditions, whether defined by holding period or other criteria. For example, French companies offering double voting rights make them available to all investors that have held their shares for the minimum duration, typically two years.

In this regard, Silicon Valley-style dual-class share arrangements are clearly problematic. Groupon, however, ameliorates the risk of entrenching its founders by limiting the lifespan of the superior shares to five years. At that time the superior and ordinary shares will merge into a single class. In the absence of a “sunset” provision, another way to maintain accountability is to require superior shares to be renewed by holders of the ordinary shares every five to 10 years.

2. To ensure that enhanced voting rights would not enable a large shareholder to take decisions unilaterally, it may be prudent to cap the number of additional votes qualifying shareholders can receive.

One possibility is to grant extra votes only up to a specified ceiling — until the combined ordinary and enhanced voting rights of a shareholder reaches, say, 30% of the total available votes.

3. Consider the types of investors likely to make use of enhanced voting rights.

For example, if the overall aim is to bolster “stewardship” behavior as much as to encourage long-term ownership, it is worth debating whether qualifying “passive” (or index) investors should be treated the same as eligible “active” shareholders. Similarly, one should explore whether enhanced voting rights would be especially beneficial in certain sectors. It could be argued, for instance, that the soundness of the financial system would be strengthened if banks have a greater proportion of committed, long-term shareholders.

4. Irrespective of how enhanced voting rights are structured, all shareholders should be accorded some “voice.”

This means that shares with diminished voting rights are preferable to those with no votes. Giving all shareholders a voice through voting provides a vital channel for them to express their views and concerns. Moreover, the possibility — however remote — of losing effective control (for example, through large stock-based acquisitions) may prompt dominant shareholders to be more careful when making strategic decisions.

5. Care should be taken when setting the qualifying criteria and related administrative requirements.

To illustrate, a minimum holding period of greater than five to seven years would likely benefit only a firm’s founders and “controlling” owners rather than institutional and other outside investors. In France, complaints abound about the burdensome procedural requirements to claim double voting rights.

Paying attention to these issues can help ensure that departing from one-share, one-vote with the view to encouraging long-term ownership will bring the intended benefits without accompanying adverse or other unintended outcomes.

 

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