Investors back dual share class restrictions within proposed UK single segment listing regime.
As more companies go public with dual class share structures (DCSS), asset owners should engage with policymakers and pre-IPO companies to defend shareholder rights, according to Caroline Escott, Senior Investment Manager at UK-based pension fund Railpen (£32 billion AUM).
“Policymakers around the world are asking investors to be effective stewards of their assets. But, at the same time, there is a gradual dilution of corporate governance safeguards and investor protections,” she told ESG Investor.
“Voting is a vital tool for expressing the investor voice – a public expression of either sanction or support for a company and its behaviour – but DCSS breaks the link between economic ownership and influence, which can bake in a disincentive for company management to engage with and listen to investors.”
Companies with a DCSS have two or more types of shares with different voting rights; shares with more voting rights attached to them tend to be held by founders, company executives or early investors.
Railpen and the Council of Institutional Investors (CII) are co-founders of the Investor Coalition for Equal Votes (ICEV), which was launched in June to campaign to curb the use of DCSS in response to increased regulatory willingness to relax listing rules to improve competitiveness.
Following the findings of the Hill UK Listing Review, the FCA is consulting on the creation of a single segment for equity shares in commercial companies, replacing the current standard and premium listing regimes.
The FCA asked whether rules it adopted around DCSS last year should be carried across to the single segment regime. The ICEV said it was supportive of this proposal, noting that “while this may reduce flexibility for companies, relative to the requirements of the standard listing segment, we believe it is imperative that the single segment regime has robust protections against long-term use of DCSS”.
The rules finalised in December allow a targeted form of DCSS within the premium listing segment, with companies required to adhere to a maximum weighted voting ratio of 20:1 and a five-year sunset clause. The latter means that companies going public with a DCSS must transition to a one share, one vote (OSOV) structure within that set timeframe.
“A reasonable time-based sunset, such as five or seven years, provides an on-ramp for founders to focus on growth and adjust to the pressures of the public markets, while ensuring that owners will ultimately have a mechanism for accountability if change becomes necessary,” said Glenn Davis, CII’s Director of Research. CII is an association promoting the interests of US-based asset owners.
The OSOV structure is ultimately “the gold standard” for asset owners, including those that are increasingly prioritising ESG-related issues in their engagement, noted Escott. DCSS “is fundamentally damaging” to the ability of asset owners or managers to hold companies accountable on sustainability-related issues, she said.
Facebook Founder and CEO Mark Zuckerberg controls 58% of the social media giant’s votes. The company has repeatedly been challenged on its governance structure alongside social-related issues, but shareholder resolutions filed at the company have failed to achieve a majority.
Use of DCSS is becoming increasingly popular amongst companies going public.
In the first half of 2021, 24% of US companies launched on public markets had a DCSS, according to research by CII.
“The coalition wants to engage with these companies that are at a sufficiently early stage in their pre-IPO journey so that we can have influence,” said Escott.
ICEV also wants to engage with other key players in the IPO infrastructure, including underwriters and law firms, Davis added.
Railpen and CII’s work with the coalition augments their individual efforts to uphold shareholders’ voting rights. In its 2022 voting policy, Railpen said it would “vote against requests for the creation or continuation of DCSS”. Last year in the US, the CII submitted draft federal legislation that would prohibit the listing of companies with a DCSS without either a sunset clause or the agreement of all shareholders.
The coalition gives concerned investors the necessary “critical mass” to bolster their engagement efforts in this area, Escott said.
Over time, the ICEV hopes to expand its membership to other asset owners and asset managers, she added. Current members include the New York City Comptroller’s Office and the Washington State Investment Board.
Escott said: “This kind of issue is a tough nut to crack. It’s going to be a multi-phase, multi-year campaign. But I hope that other investors increasingly realise just how fundamental equal voting rights are to our ability to be effective and responsible stewards of our assets.”