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Commentary

A Silent Threat to Investors

Douglass Guernsey, Shareholder Advocate at Green Century Capital Management, outlines how supermajority voting challenges asset managers and their fiduciary duty.

Investors know that environmental risks like climate change, deforestation and biodiversity loss pose threats to portfolios. But, as this autumn’s attempt by Brazilian meat-processing firm JBS to list on the New York Stock Exchange (NYSE) shows, there is another serious, existential governance threat emerging from within the system itself.

The rise of supermajority shares

Often implemented as a way protect start-ups by giving founders and early investors stock with extra voting rights, so called supermajority or dual share class structures (DCSS) are increasingly being used to consolidate ownership and crowd out minority shareholders.

The growing number of companies with supermajority voting rights has dramatic implications for financial institutions’ ability to carry out their fiduciary duties. By taking away shareholder’s right to influence, they threaten the entire process of active ownership and engagement, both of which are crucial for investors to remain sound stewards of their beneficiaries’ capital.  

In 2018, notable investors such as Warren Buffett, Jamie Dimon and Larry Fink signed an open letter on ‘Common sense corporate governance principles’ warning against “dual class voting” and stating that “all shareholders should be treated equally in any corporate transaction”. 

While business owners might be attracted to this kind of structuring, there are numerous downsides. Social media platform Snap, for example, famously sold shares with zero voting rights in 2017, leading to an uproar from pension funds and other institutional investors. The company’s founders now control over 97% of the voting rights, but its share price has plummeted to around half of the original value. 

The same year saw meal-prep company Blue Apron also issued zero voting shares at its IPO, dramatically centralising insider control. Again, the value of the stock plunged, falling from US$10 per share to 66 cents in little more than a year, wiping out nearly US$2 billion in value. Ride-sharing platform Lyft, another company with supermajority shares, has lost over 80% of its value since IPO.

Further, a growing body of of work suggests that, over the long term, the entrenchment of founders that can result from supermajority structures – where some insider shares have 10, 20 or 40 times the voting power of everyday investors – produces lower investment returns. Other risks include insular groupthink, self-dealing and poor accounting controls, without an appropriate level of accountability to shareholders. 

JBS IPO case study  

Everything that is wrong about supermajority shares is epitomised by the planned JBS IPO on NYSE this autumn. 

With a market capitalisation of over US$8 billion, JBS is the largest meat producer in the world and a million miles from the kind of start-ups for which supermajority shares were intended. 

JBS’ emissions are estimated to exceed those of Spain, its supply chain is associated with deforestation, human rights abuses, land grabs, and labour violations, and the business has been linked to some of the largest corruption scandals in history. The company’s methane emissions alone exceed the livestock methane emissions of France, Germany, Canada and New Zealand combined. 

It’s clear that JBS should be of ever-increasing concern to financial institutions for many reasons. The company’s latest attempt in a decade-long campaign to list shares on the NYSE via a dual listing under a new Dutch parent company – JBS NV –  is bringing this issue to a head.

JBS’ plans involve a two-tier share conversion system, where minority shareholders may convert no more than 55% of their existing Class A shares (entitled to one vote per share at general shareholder meetings) into Class B shares (entitled to ten votes per share at general shareholder meetings). Only the founding Batista family may convert 100% of their Class A Shares to Class B shares. This DCSS would consolidate near absolute control for the Batista family, who will emerge with around 85% of the aggregate voting power in JBS NV at the point of listing – a significant increase from their existing 48.8%. 

As a result, existing and future minority shareholders will have very little influence over corporate decision making, such as remuneration, distribution of profits, environmental risks, appointing the board of directors, and mergers and acquisitions. 

This kind of move at a company of JBS’ size and scale not only threatens investors’ ability engage with the company and uphold their fiduciary duty, but has profound implications for the climate, biodiversity and human rights across the world. 

To and fro in the battle for shareholder rights

In April this year, S&P reversed a 2017 policy of barring new companies with DCSS from indexes, heralding much concern from investors over risks associated with entrenched management and limited disclosures.

Additionally, there have been attempts to resist corporate accountability and restrict shareholder influence, with powerful lobbying efforts by interest groups like the National Association of Manufacturers and the National Center for Public Policy Research seeking to severely limit the voice of ordinary shareholders. There was also a recent unsuccessful attempt by a cross-party group of right-wing and liberal MEPs to block the adoption of new sustainability reporting standards in the EU.

Responsible investors dedicate vast amounts of time to urgent issues like climate and biodiversity loss. This is crucial – but it’s important we remember that significant risks can emerge from inside our financial system too.  

Supermajority shares are particularly concerning as they severely limit investors’ capacity to influence firms on pressing global risks. 

In the case of JBS, the potential consolidation of ownership in a company with tremendous climate and nature impacts is real cause for worldwide concern. It’s one that both current and potential JBS shareholders, and the wider investor community, need to take time to understand and stand against. 

As a rule of thumb, when it comes to IPOs, we believe investors should publicly push for the principle of ‘one share, one vote’ as good corporate governance and equitable treatment of investors.

With existing portfolio companies, asset managers can actively engage on the risks associated with supermajority shares; sending coalition letters as a first step and submitting viable shareholder resolutions for the removal of these preferential shares as an escalation. Any proxy votes on DCSS must be carefully considered to protect investor rights and allow asset managers to express their rights.

More broadly, it is vital investors make sure attempts to steal away their capacity to engage don’t happen silently. We must continue to push for transparency, accountability and robust shareholder relations across the board. 

In their open letter on corporate governance, Warren Buffett and others emphasised how we “depend on our public companies for jobs, saving for college, savings to buy a home, and retirement”.

It is vital for financial institutions to be able to continue to address risks at the companies they own on behalf of their beneficiaries – and hold on to their ability to conduct sound fiduciary analysis with all available data.

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