The Importance of ‘One-Share, One-Vote’
The Importance of ‘One-Share, One-Vote’
Dr. Rory Sullivan
Shareholders are granted a range of rights when they own or hold the shares of a company. The right to vote is arguably the most important of all shareholder rights, as it helps align the interests of company management with those of its investors.
In recent years, there has been a significant increase in the number and proportion of initial public offerings (IPOs) that have dual-class share structures. Dual-class share structures conflict directly with the principle of ‘one-share, one-vote’ which means that all shareholders should have equal voting rights in public companies and each shareholder should have one vote per share.
What are Dual-class Share Structures?
Dual-class share structures, also known as unequal voting rights, are equity structures where a company has issued two or more share classes, where these classes differ in terms of voting rights. The classes with more voting rights tend to be offered to company insiders, and those with limited voting rights are generally offered to the general public.
Researching the rise and risks of dual-class share structures
In 2023, we worked with the Investor Coalition for Equal Votes (ICEV) to develop a report – Undermining the Shareholder Voice: The Rise and Risks of Unequal Voting Rights – analysing the implications of these share structures. Our research found that:
· Any potential financial advantages of dual-class share companies recede over time, usually within a few years of the IPO.
· Dual-class shares give company insiders power over the company that is frequently significantly greater than their economic interest in the company.
· In companies with these structures, there is clear evidence that management and boards are more insulated from the perspective of independent investors, making it more difficult for shareholders to ensure that boards are appropriately structured, to influence company strategy, to challenge capital expenditure decisions and to access robust financial and other information about the company.
The report calls for companies with dual structures to adopt sunset clauses – that is to say they cease to be effective after a certain date – and for robust investor protection measures to be put in place for companies looking to list with dual-class structures gin the future, and for those who are currently listed with dual-class structures.
Chronos’ View
Our research highlights multiple high-profile cases where dual-class share structures have enabled privileged insiders to manipulate voting outcomes to their own benefit, to the potential detriment of investors and beneficiaries.
The implications are not confined to the individual companies where these structures are adopted. They also have implications for the functioning of investment markets. Because their effect is to limit the influence that long-term investors can exert, the widespread adoption of such structures in a market may limit investors’ ability to engage effectively with these companies, and may limit the willingness of long-term investors to invest in such companies.
Notes
1. The report – Undermining the Shareholder Voice: The Rise and Risks of Unequal Voting Rights – can be found at: https://cdn-suk-railpencom-live-001.azureedge.net/media/media/pmcil2eb/icev-report-2023-undermining-the-shareholder-voice.pdf
2. The report was published alongside an Investor Statement on Unequal Voting Rights, which is intended to act as a call to action for investors who are concerned about the rise of unequal voting rights and is open to both asset manager and asset owner signatories.
3. ICEV is a coalition of investors formed to promote the adoption of Equal Voting Rights through engagement with pre-IPO companies and their advisers, other financial market participants, policymakers and regulators. ICEV was co-founded by the Council of Institutional Investors (CII), Railpen, and several US pensions funds in 2022. To date, it includes investors with around $2.5 trillion in assets. See further https://www.railpen.com/knowledge-hub/our-thinking/2023/icev-one-share-one-vote/