Pension Funds Voice Concerns on Erosion of Shareholder Rights 

Investor Coalition for Equal Votes finds financial disadvantage in dual-class shares, as regulation on shareholder rights mooted at London conference.   

A US$2.5 trillion pension fund coalition has called for the phase out of unequal voting rights for shareholders at companies, as concerns were raised at this week’s Pensions and Lifetime Savings Association (PLSA) ESG conference on the level of influence shareholders have over listed fiirms.  

The Investor Coalition for Equal Votes (ICEV) launched last year to campaign against dual-class share structures (DCSS), which typically grant enhanced voting rights to founders or early investors of companies than common stock issued at public offering.  

The model has been particularly popular with US-based tech companies such as Snap and Meta, the latter of which CEO Mark Zuckerberg effectively controls around 61% of votes, through holding 13.6% of ‘class B shares’, worth ten votes each.  

Between 2020 and 2022, over 40% of US tech IPOs used the DCSS and 20% of US non-tech IPOs – significantly higher levels than historic averages. 

The financial market has seen significant moves in support of dual-class shares this year. S&P Global reversed a 2017 decision to bar new companies with dual-class shares from its indices and in May, the UK’s Financial Conduct Authority proposed new listing rules which would be “more permissive” on dual class shares, allowing directors to hold shares with unlimited voting rights, subject to a 10-year sunset clause. 

But research published today by the ICEV, chaired by UK-based Railpen and US-based Council of Institutional Investors (CII), has found that any potential financial advantage of DCSS for companies, if they exist, “tend to recede quite rapidly over a short period of time”.  

This is a consistent finding from the literature, although the timeframe over which these financial advantages erode differs between authors who have written on this topic, the research said.  

Caroline Escott, Chair of ICEV and Senior Investment Manager at Railpen, said the right to vote “is arguably the most important of all shareholder rights”, which was undermined by DCSS that removed “a key accountability mechanism for poorly performing management”.  

“Our report highlights several high-profile cases where DCSS have enabled privileged insiders to manipulate voting outcomes to their own benefit, to the detriment of investors and, ultimately, the beneficiaries whose interests we serve,” she said. 

Shareholder rights regulation 

ICEV’s work was a talking point at this week’s PLSA ESG conference, where during a debate with major UK pension funds Nest, the Church of England Pensions Board (CoEPB) and the Pension Protection Fund, it was questioned whether companies genuinely listened to their concerns.  

An onlooker to the panel, focused on stewardship, said the pension funds’ presentations, which had a focus on oil and gas majors retreating on climate pledges this year, demonstrated that companies were not listening to shareholders or avoiding the conversation until a shareholder vote was lodged on an issue.  

In response, Laura Hillis, Director, Climate and Environment at the CoEPB, said there could be a role for greater regulation and government-level engagement on shareholder rights as an issue and the sector thinking collectively about the issue as well.  “If you’re not happy with a company you do need to escalate and a lot of it doesn’t always happen,” she said. “Sometimes you can be unhappy and keep having chats with the company and repeating the same thing. I don’t think that’s a great approach. I think we do really need to think about putting resources into escalation.” 

The CoEPB, which decided to divest oil and gas in May for stalling on net zero progress, has released its inaugural climate action plan today (30 November).  

Another theme at the PLSA conference was the ‘politicisation’ of ESG.  

Ewa Jackson, Head of Sustainable & Transition Client Solutions, EMEA, at asset manager BlackRock, said: “Sustainability and ESG had been highly weaponised in the past 18 to 24 months” in the US in both red states and blue states.  

“The blue states think that sustainability needs to go a lot further and the red states saying it needs to go nowhere at all.”  

In July, BlackRock CEO Larry Fink said he had stopped using the “weaponised term” ESG.  

A new survey of pension funds managing €1.91 trillion (US$2.1 trillion) globally has also found the anti-ESG movement has unnerved the industry, with 56% saying it has hindered progress in ESG investing.  

The survey, published by CREATE-Research and European asset manager Amundi, found that pension funds are worried that their participation in collaborative ESG initiatives could expose them to accusations of collusion and some US-based asset managers are now avoiding the term ‘ESG’ in a bid to placate ESG opponents.  

However, 53% still expect the share of ESG investing in their active portfolios to rise, with that figure sitting at 49% for passive.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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