Investor Initiative Aims to “Push Back” on Unequal Voting Rights

Newly launched coalition says differential voting rights dilute investors’ ability to influence companies and hold them to account. 

Asset owners in the UK and US have teamed up to launch the Investor Coalition for Equal Votes (ICEV), which will campaign to curb the use of dual-class share structures at a time when regulators are considering changing listing rules. 

Railpen, which manages the UK’s railways pension schemes, and the Council of Institutional Investors, a non-profit association of US-based employee benefit funds, together represent the owners of assets worth more than US$1 trillion. 

Dual-class share structures allow companies to issue more than one type of share, with those owned by the founder and company executives usually carrying more voting weight than shares held by public investors. 

This type of share structure has become more common in recent years, mostly among small companies and highly concentrated in certain industry groups, such as media and entertainment, Harvard Law Review research shows. 

Investors overwhelmingly prefer the one-share, one-vote capital structure, while companies with dual-class structures do not necessarily offer an edge on performance, the research showed. About 7% of Russell 3000 companies have a dual structure. 

“Dual-class share structures dilute market discipline and the ability of minority shareholders like Railpen properly to hold companies to account,” said Caroline Escott, ICEV Chair and Senior Investment Manager at Railpen 

“Instead, voting control is skewed in the interests of the few who own those share classes with superior voting rights. This means that a company’s senior executives are more insulated from, and are less incentivised to engage with, the broader shareholder base, which dampens the investor voice.” 

While in some circumstances it may make sense for founders to maintain voting control – if a company is at an early stage or in a sector prone to volatility – there should be sunset clauses to ensure that these rights don’t outlast their benefits, the group said. 

Regulators taking a closer look

The move comes at a time when the regulators are considering reforms to the permitted share structures of companies at the point of public listing, in a bid to boost growth and innovation in stock markets. 

The UK’s Financial Conduct Authority last month said in a discussion paper that it is seeking views on how companies with dual-class share structures should be treated under proposed new listing rules. 

One option, says the FCA, would be to allow dual-class share structures but with conditions, such as a five-year time limit for using weighted voting rights, a maximum weighted voting ratio, or restricting those voting rights to certain company directors or votes. 

In the US, the Council of Institutional Investors last year submitted draft federal legislation that would prohibit the listing of companies with multi-class stock with unequal voting rights without either a sunset clause or the agreement of all shareholders. 

“We consider the latest FCA discussion paper on shifting to a new single listing regime a key opportunity for the investor community to speak up in support of the recent corporate governance safeguards placed around the use of DCSS (in response to the UK Listings Review) and to ensure they do not get diluted,” said ICEV’s Escott.

In December, the FCA updated UK listing rules, allowing a targeted and time-limited form of dual-class share structure to be used within the premium listing category, providing certain conditions were met.   

Escott added that the group will also “work with CII to provide the global investor perspective.” 

Among ICEV’s members are the Minnesota State Board of Investment, the New York City Comptroller’s Office, and the New York State Common Retirement Fund. 

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