Tenure Voting and the U.S. Public Company

In today’s capital markets the principle of one share, one vote is increasingly under scrutiny. The rise of high-vote and no-vote stock has created a popular alternative for companies at the initial public offering stage. According to Dealogic, approximately 14% of IPOs in the past year used some form of dual-class stock, compared to only 1% in 2005. Prominent companies with a separate class of high-vote stock include Alibaba, Facebook, Ford, Google (now Alphabet), and Square.

In the paper Tenure Voting and the U.S. Public Company, co-authored with U.C. Berkeley Law Professor Steven Davidoff Solomon and my colleague Aaron Jedidiah Benjamin, we examine “tenure voting” as an alternative to the prevailing one share, one vote and dual-class models. Tenure voting is the award of an additional number of votes to shareholders depending upon the duration of their ownership.

The rise of dual-class stock has created a culture of “haves” and “have-nots.” Companies with dual-class stock may be more insulated from shareholder activism and other shareholder demands than companies with a single class of stock. Supporters of these types of structures often claim that such structures provide companies greater ability to plan and act over the “long-term,” taking into account shareholder considerations but also avoiding short-term actions that can be taken just to boost short-term stock prices while being detrimental to creating long-term value.

In contrast, many public companies with one share, one vote assert that they are unable to shield themselves from shareholder pressure to increase their stock price. They complain that this forces them to take short-term actions and engage in financial engineering that may limit the company’s ability to grow and innovate for the long term.

The purpose of this white paper is not to resolve or take sides in the debate over long and short-termism, though we recognize that the debate is reshaping the field of corporate governance. Rather, the purpose is to examine an innovative response to the rise of dual-class stock: the use of tenure voting by U.S. public companies. There are a variety of different models of tenure voting, but the core principles driving consideration of and support for tenure voting are: (1) giving long-term shareholders increased voting power over corporate decisions, and (2) incentivizing shareholders to be long-term investors. Tenure voting has gained support in many countries in recent years.

Tenure voting has the potential to be a more palatable alternative to high-vote and no-vote shares while also addressing current arguments about long- and short-termism in U.S. markets. By design, tenure voting rewards all shareholders who hold their shares for an extended period. This could better align incentives for all shareholders, since all shareholders who wish to take action for the long term will have greater influence in those decisions, while shareholders less interested in voting and more interested in trading will still have a vote as well as the ability to freely trade their shares.

This paper is designed to be a roadmap of the issues and considerations for companies and market participants contemplating tenure voting under current market conditions and regulations. In particular, we conclude that companies which are currently listed on the New York Stock Exchange and Nasdaq can adopt tenure voting under current interpretations of each stock exchanges’ rules. While we do not propose tenure voting as a “one-size-fits-all” model, we conclude that, after examining the current voting landscape and perceived problems of short-termism, tenure voting offers a middle option that should be considered.

The full paper is available for download here.