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Dual class shares: Asset owners fight back

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14 Jul 2022

A group of asset owners have come together to fight the ongoing march of dual-class shares to ensure that their voices are heard, finds Andrew Holt.

A group of asset owners have come together to fight the ongoing march of dual-class shares to ensure that their voices are heard, finds Andrew Holt.

Global asset owners and the US association of public, corporate and union employee benefit funds known collectively as the Council of Institutional Investors (CII) have come together to create the Investor Coalition for Equal Votes (ICEV) to fight against unequal voting rights at listed companies.

Steering the initiative is Railpen, the £37bn UK railways pension scheme, along with the Minnesota State Board of Investment.

Joining them is the New York City Comptroller’s Office, the New York State Common Retirement Fund, Ohio Public Employees Retirement System and the Washington State Investment Board.

The group’s prime motivation is to prevent further enabling of dual-class share structures – without strict mandatory timebased sunset clauses – in the US and UK.

Share concern

The founding ICEV members have expressed their concern that differential voting rights dilute the ability of public shareholders to positively influence company management and hold them to account where necessary.

Although many new public companies embrace equal voting rights, public shareholder rights have been eroded among a minority of debuting companies in recent years across several countries, as company founders seek to secure disproportionate control and policymakers seek to encourage firms to list in
their jurisdictions.

In the first phase of the initiative, ICEV will undertake a campaign with pre-IPO companies and their advisers, as well as policymakers, commentators and index providers in priority jurisdictions. This will take place through engagement with private and public market participants as well as in policy forums.

Commenting on the launch of ICEV, Caroline Escott (pictured), senior investment manager at Railpen and ICEV’s chair, said: “At a time when policymakers increasingly recognise the value of effective investor stewardship to achieving good member outcomes, it’s vital that the shareholder voice is heard by company
management.

“Voting is an important part of the stewardship toolkit, but dual-class share structures without automatic time-based sunset clauses mean long-term investors are trying to influence with one hand tied behind our backs.

“We are delighted to be working with the CII, a vocal and longstanding champion of corporate governance, and some of the world’s leading pension funds to make the case for equal voting rights at portfolio companies,” Escott added.

“The issue is fundamental to the ability to engage with, and hold companies to account on, material risks and opportunities, and we hope that the work of ICEV will mark a turning point in the dual-class share structure debate.”

Hear my voice

The group is expected to include additional asset owners over time – with the potential of like-minded asset managers joining.

ICEV plans to open dialogue with key market participants and policymakers, emphasising the importance of the proportionate shareholder voice to effective stewardship and long-term sustainable company performance.

The creation of ICEV ties-in with Railpen’s objective of making one-share, one-vote, one of its central engagement and voting priorities going forward.

Some big-hitting companies have gone the down dual-class structure route, including Google, Facebook and Snap, because of the amount of control it gives founders in overseeing the company.

Amy Borrus, CII’s executive director, added that indefinite control is alluring to any founder contemplating an IPO. “So it’s incumbent on investors to communicate early and together about this long-term corporate governance trainwreck. We are pleased to be partnering with Railpen as co-leaders in this campaign, as this issue is increasingly global,” she added.

Legislation push This effort complements CII’s current draft legislation in the US that would require stock exchanges to bar listings of new
dual-class companies unless they have seven-year sunset provisions, or if each class, voting separately, approves the unequal
structure within seven years of the IPO.

“We will look to coalition members for their continued support in advancing the legislation,” Borrus said.

ICEV carries some real clout collectively managing assets worth more than $1trn (£820bn) on behalf of nearly five-and-a half-million members.

In the UK, companies with dual-class share structures can now list on the main market, following a rule change last year. The move came as the structure was already being used on exchanges in New York and Hong Kong, which was seen as giving them a competitive advantage over London. The change could also be seen as part of a broader push by former chancellor Rishi Sunak to make London a more appealing destination for global investors and companies post Brexit.

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