“One share, one vote,’’ a bedrock principle of Western corporate governance, is back in the spotlight.
Except this time the aim is to diminish its application rather than extend its footprint.
Rising short-termism among investors – which threatens to destabilize both companies and the wider economy – is prompting a reconsideration of the principle that all shareholders should have equal say.
Prominent commentators such as former U.S. Vice President Al Gore, McKinsey global managing director Dominic Barton and Vanguard Group founder John Bogle have advocated bolstering the voting rights of long-term shareholders or withholding them from short-term investors. And the Financial Times reported recently that the European Commission was preparing a proposal to give ‘’loyal’’ shareholders extra voting influence.
That respected commentators and policymakers are proposing apportioning voting rights unequally among ordinary shareholders – and that high-profile companies like Facebook are actually doing it – is remarkable. Since the early 1990s, one share, one vote has been the gold standard of corporate governance. Even countries where dual-class shares are prevalent, such as Sweden, have sought to narrow the ‘’power distance’’ created by such structures.
To what extent should discrimination among shareholders be countenanced? Here are three suggestions:
•For reasons of fairness and to avoid entrenching control, ‘’enhanced voting rights’’ – which may take the form of additional votes, bonus shares, a separate share class with superior voting rights or related instruments – should not be distributed only to company founders and other insiders.
Rather, all investors should be eligible to receive them if they meet the qualifying conditions, whether defined by holding period or other criteria.
•To ensure that enhanced voting rights don’t enable a large shareholder to make decisions unilaterally, it may be prudent to cap the number of additional votes qualifying shareholders can receive. One possibility is to grant extra votes only up to a specified ceiling – until the combined ordinary and enhanced voting rights of a shareholder reaches, say, 30 percent of the total available votes.
•Consider the types of investors likely to make use of enhanced voting rights. For example, if the overall aim is to bolster stewardship behavior as much as to encourage long-term ownership, it is worth debating whether qualifying ‘’passive’’ (or index) investors should be treated the same as eligible ‘’active’’ shareholders.
Paying attention to these issues can help ensure that departing from a one-share-one-vote policy with a view to encouraging long-term ownership will bring the intended benefits without any adverse outcomes.
(Simon C.Y. Wong is a partner at the investment firm Governance for Owners, an adjunct professor of law at Northwestern University and a visiting fellow at the London School of Economics and Political Science.)