Dual Class Shares
In our continuing series, Corporate Governance Expert David Beatty explains the growth of dual class share offerings.
Dual Class Shares
David Beatty:
One of the features of the stock markets these days is the growth of something called a dual class share offering. That means, essentially, that if I'm the founder, I'm going to get 10 votes a share for my shares, maybe class A, and I'm going to give you, the general public, class B shares, and they get one vote per share. Some of these companies are really heavily geared that way. For example, Magna, as I recall, Frank Stronach owned one percent of the equity, but he controls something in the order of 78% of the votes.
Because of this dissimilar nature of equity versus votes, the large institutional investors have been adamantly opposed to dual class share companies. Council of Institutional Investors in the United States has a publicly stated policy against them and is trying to lobby the SEC and state governments to outlaw them. In Canada, the Canadian Coalition for Good Governance has a public policy against dual class shares, and in the United Kingdom, the International Corporate Governance Network representing some $33 trillion worth of assets under management, $33 trillion, has also come out against dual class shares.
But why is that? Clearly because they believe that it should be one vote per one share and all shares should be equal. And maybe they're right. But the other side of that coin is to think about the costs that currently exist to be a publicly traded company. There's a huge amount of short term-ism in this marketplace.
There's a huge amount of activism, all of which push companies to devote maybe 20% of the C-suite time defending off clever questions from newly minted MBAs. They may be clever, but they certainly don't know a lot about the business. Marc Andreessen, who's the managing partner and founder of Andreessen Horowitz, easily the most celebrated venture capital firm in Silicon Valley. He said at a Stanford conference two years ago, "You know, if I ever took one of our companies public, I'd take it public with dual class shares. I want my management team and I want my team to be working 150% of the time on building the future of this company, not spending 20 to 50% of their time fending off questions from newly minted MBAs." That's Marc Andreessen.
So there's another side to this coin. Yeah, dual class shares provide unequal voting rights. Yes, that could lead to injustices with compensation, could lead to injustices with third party follow-ons, maybe the idiot air, but there's no monopoly on bad governance in the dual class share regime. Just think of the most recent ones. Boeing, that looked pretty good. One class one share. Wells Fargo, one vote, one share. None of these boards work all that well.
So the fact is more and more companies are coming public with dual class shares. Last year, 30% of the new listings on the New York Stock Exchange came with dual class shares. And last year as well, Singapore and Hong Kong allowed dual class shares for the first time, seeing that so much of the tech world was going to come to public markets insulated from these short term and activism costs through a dual class share corporation. So they're here, they're here to stay, you better learn to live with them and not just ideologically push them aside.
David Beatty is an adjunct professor and Conway chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management. Over his career, he has served on more than 39 boards of directors and been chair of nine publicly traded companies. He was the founding managing director of the Canadian Coalition for Good Governance (2003 to 2008). A version of this article will also appear in the Winter 2017 edition of Rotman Management, published by the University of Toronto’s Rotman School of Management.