Building a Portfolio

5 Views on Share-Class Structures and Voting Rights

With proxy season under way, many investors are butting up against the multi-tier share-class structures of some firms. While many large corporations give one vote to each outstanding share, a number of companies have given outsize voting rights to their founders, stymieing efforts to pass shareholder resolutions on governance issues.

Here’s a look at the shareholder–voting-rights debate from five perspectives.

CalSTRS Goes up against Facebook

What happened: Aeisha Mastagni, a portfolio manager with the California State Teachers’ Retirement System, the second-largest pension fund in the country, wrote an op-ed criticizing the dual-class share structures at social media giant Facebook, where CEO Mark Zuckerberg’s Class B shares give him control over 60% of the share votes at the company—10 times the votes of regular Class A shareholders.

Why it matters: Mastagni’s criticism of Facebook reflects the broader trend of multiclass share structures coming under fire from institutional shareholders and stock index providers, who have threatened to restrict companies that feature dual-class shareholdings in a move that could potentially limit their liquidity.

Read More: A huge pension fund says Facebook is like a ‘dictatorship,’ The Washington Post, May 10, 2018

Shareholder Engagement Asserting Its Value

What happened: On five separate issues—climate change, water scarcity, human-rights violations, political spending by companies, and global health—shareholder engagement with corporate management has begun to have an impact.

Why it matters: Increased communication resulting from shareholder engagement helps all parties involved, facilitating a better understanding of the company for shareholders while giving companies a clear view of institutional shareholders’ concerns. And notable shareholder-engagement wins underscore the importance of leveling voting rights.

Read more: 5 Examples of How Shareholder Engagement Can Enact Change, Impactivate: The Impact Investing Exchange, September 26, 2017

Companies Choose Divergent Paths

What happened: Mark Pincus, CEO of game company Zynga, converted his 70% super-voting Class A shares into regular 10% Class B shares, granting shareholders equal control of the company’s decision-making and its future.

Meanwhile, Sardar Biglari, who owns more than half of his namesake company, which controls the Steak ‘n Shake restaurant chain, pushed through a dual-share class structure that created a class of stock with no votes.

Why it matters: While the mindset and moves may be different, the short-term financial implications were similar. Zynga shares lost 2/3rds of their value. And S&P Dow Jones Indices said it would drop the Biglari from the S&P SmallCap 600 index in response to the newly introduced dual-class structure, sending the stock price down 20%. However, these short-term shocks don’t translate into portents for the future. The effects over time remain to be seen.

Read More: A tale of two super-­voting stakes—­and steaks, NASDAQ, May 3, 2018

Taking the Long View

What happened: A study on the share value of dual-class firms found that while their value at initial public offering is, on average, 11% higher than similar firms with a single share class, the extra value dissipates in six to nine years and eventually becomes negative. For dual-class firms that trade at a discount to single-class companies at the IPO, the discount tends to persist into maturity.

Why it matters: Adding nuance to the potentially black-and-white share-class debate, the researchers recommended requiring sunset provisions so that firms that adopt dual-class systems are required to transition to a single-class structure in a timely manner.

Read more: The Life-Cycle of Dual Class Firms, European Corporate Governance Institute, May 17, 2018

Indexes Penalizing Unequal Share-Class Structures

What happened: Noting that there’s evidence that “deviations from one-share-one vote affect the value of outside equity negatively,” index firm MSCI said it was considering a proposal to continue including firms with dual- or multiclass shares in its share indexes. However, they will adjust their weights with a formula that takes reduced voting power for some share classes into account.

Why it matters: Adding further financial disincentives to imbalanced voting rights, the proposal would penalize multiclass share structures, especially those that have the widest disparity between shares and the number of votes.

Read more: Should equity indexes include stocks of companies with share classes having unequal voting rights?, MSCI, January 2018

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