30/07/2007
Double voting rights: dangers of delusion
Guy Jubb looks at the risks companies run by giving unequal weight to shareholders.
One-share one-vote is a cornerstone of good corporate governance. It makes all shareholders equal and gives them an incentive to exercise their ownership rights. Yet, many of Europe's leading companies fail to give shareholders equal rights.
One of the most important voting impediments is the existence of double voting rights for certain classes of shareholders. These rights are most frequently conferred for shares that are held for more than a pre-determined period.
The holders of shares for the required period enjoy twice the number of votes, provided they have registered those shares and do not do anything to interrupt their ownership.
Companies with double voting rights seek to reward loyalty. But in practice, such rights are divisive and serve to protect companies - and as pertinently their managements - from the disciplines of capital markets. They have the potential to incubate economic inefficiencies and they frustrate shareholders from effectively holding directors to account.
Institutional investors do not like irrevocably committing themselves to continuous share ownership. Thus, fund managers tend to oppose registration, immobilisation, or anything else that ties their hands. Any requirement of such mechanisms only serves to discourage voting.
Shareowners who do not mind such impositions are - aside from the increasingly rare loyal private investor - non-financial investors who have some objective other than investment return. Typically, this objective is to maintain control of the enterprise in question because of some external factor such as business relationships between the shareowner and the issuer. The problem is compounded when double voting rights are twinned - as is sometimes the case - with voting caps, that disenfranchise shareholders owning over a designated equity ownership threshold - typically above 5 per cent or 10 per cent.
French companies favour voting caps and double voting rights far more than most of their European counterparts. An outstanding example is Lafarge, which provides double voting rights for shares held over two years but has a 1 per cent voting cap threshold. The cap serves an obvious purpose: not only does it immunise the company against takeover, it also makes it unlikely that a shareholders' meeting would ever disagree with management.
Lengthy holding periods required before double voting rights vest are also revealing: three years at Christian Dior and ten years at Pernod-Ricard.
Why should double voting rights be opposed? First, a minority shareholder in a company with double voting rights can acquire a controlling stake, without paying the premium the market normally requires for control. History suggests such minority shareholders frequently maintain close relationships with management, often reflected in a spider's web of shareholdings and directorships.
Today's global investors have no truck with situations where insiders have control, and securities in such companies usually trade at a discount to what would otherwise be their true worth. Minority shareholders with controlling interests tend to entrench inefficient management. They can induce management to ignore the needs of minority shareholders. They immunise companies from the disciplines of capital markets.
Second, transparency. I like to know who I'm dealing with. But when it comes to companies with extensive double voting rights, who can say who controls their destinies? This is an issue for employees as well as for capital markets. Both need to know who is taking decisions on their behalf. It is an issue for minority investors when only the Board knows where its voting support lies, especially if there is a predator on the prowl.
Third, share lending. Under share lending arrangements, the lender gives the borrower full economic and voting rights in return for a fee. Normally, the borrowed shares will be sold in the market, which cancels the double voting right. However, if continuity of ownership is not broken and the borrower retains the shares, there is the risk that a borrower might get to exercise the double vote. Since it is primarily long-term investors who are the main lenders, today's long-term investors can become tomorrow's short-term hedge fund. It is fair to point out that a number of companies with double voting rights refute the assertion that double voting rights can be lent - I look forward to being convinced on this point.
As a matter of principle, Standard Life Investments opposes double shareholder rights. In this AGM season we have supported several resolutions that seek to remove voting impediments to one-share one-vote, mainly in French companies. I urge other investors to resist minority oppression, support transparency and recognise the dangers of share lending by opposing double voting rights and thereby encourage a level playing field for all shareholders.
Guy Jubb, is head of corporate governance at Standard Life Investments
First published in Financial Times, 30 July 2007.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
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