Major Investors, Indexes Not Pleased with Non-Voting Shares
According to the Council of Institutional Investors (CII), the growing practice of start-up companies opting for dual-class or multi-class share structures with unequal voting rights represents “a full-scale repudiation of the ‘one share, one vote’ principle that is core to good corporate governance.” In CII’s view, “when a company goes to the capital markets to raise money from the public, public investors are entitled to certain protections and basic rights, including a right to vote that is proportional to the size of the investor’s holdings.” CII and other critics argue that multi-class share structures serve to entrench boards and management by eliminating investors’ means of holding them accountable.
Defenders of multi-class share structures argue that companies will perform better if management is insulated from shareholder pressure for short-term profits. In the colorful language of one commentator, the rationale behind a multi-class structure is that “I’m a genius and leave me alone to let me be a genius.”
Defenders also argue that investors who purchase non-voting shares do so of their own freewill, but things are not so simple. Due to the rise of index investing, CII argues that many investors “will indirectly invest in [any company] that issues non-voting shares if major index providers provide these share classes to be included in their indexes.” Cognizant of this dilemma, major stock index firms are considering possible restrictions on the inclusion of companies with unequal voting rights in their indexes, as discussed in a recent Wall Street Journal article.