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E-MailCaroline Escott is a Senior Investment Manager and Chair and Shane McCullagh is an Investment Analyst at Investor Coalition for Equal Votes (ICEV). This post is based on an ICEV memorandum by Ms. Escott, Mr. McCullagh, and Glenn Davis.
It is a cornerstone of the capitalist model that shareholders at companies should have a voice in proportion to their economic ownership: “one share, one vote”. This ability to effectively scrutinise, challenge and hold companies to account is a crucial part of shareholder democracy and good corporate governance, and research shows that, ultimately, it drives better long-term outcomes for companies [1].
However, in recent years, there has been a significant increase in the number and proportion of companies going public with dual-class share structures (DCSS) in the US [2]. DCSS are considered unequal voting rights because they go against the ‘one share, one vote’ philosophy, conferring greater voting power to certain shareholders that is not in line with their economic ownership in the company.
These US market developments have been accompanied by regulatory and policy initiatives in the UK [3], Europe [4] and Asia [5] that have rolled back long-standing investor protections and further enabled companies to list with DCSS, diluting shareholders’ ability to influence portfolio companies through the use of their votes at shareholder meetings.
As part owners of a company, with a key interest in ensuring their investee companies achieve long-term and sustainable value creation, independent shareholders’ ability to influence company approaches on material issues is important for good outcomes, not only for shareholders and their beneficiaries, but also for companies. It is therefore vital to the effective functioning of capital markets that a company’s shareholders should have a voice in proportion to their economic ownership of a firm.
Research shows that the entrenchment of management that comes about as a result of DCSS can hinder long-term financial performance of companies, with several notable academic and industry publications suggesting that long-term company value is adversely impacted by a misalignment between voting rights and equity stakes. The literature generally indicates that any potential financial advantages of DCSS for companies and shareholders, if they exist, tend to recede quite rapidly over a short period of time [6].
Investors have therefore long decried firms who decide to list with unequal voting rights without a suitable time-based sunset clause [7]. This can be seen in the long-standing campaigns by bodies such as the Council of Institutional Investors (CII) [8], the International Corporate Governance Network (ICGN), the Australian Council of Superannuation Investors (ACSI), the Asian Corporate Governance Association (ACGA) and many others against DCSS.
What are dual-class share structures?Dual-class share structures (also referred to as dual-class stock, multi-class voting structures or unequal voting rights) are equity structures where a company has issued two or more share classes (e.g. Class A and Class B shares), with different voting rights. When multiple share classes of stock are issued, the class with limited (if any) voting rights is normally offered to the general public. Classes with more voting rights are typically only offered to insiders such as company founders, executives and family members, allowing them to retain control of the company |
The perspective of global investor groupsAsian Corporate Governance Association (ACGA, Asia): “We believe allowing DCS [dual-class shares] in public markets in Asia would be a significant strategic mistake and will undermine solid progress being made in corporate governance [across the market].” ACGA presentation to IOSCO, 2017 Australian Council of Superannuation Investors (ACSI, Australia): “Corporate governance structures and practices should protect and enhance the board’s accountability to shareholders. Companies should not take any actions which disenfranchise shareholders or inhibit shareholder participation in company meetings. We support a ‘one share, one vote’ capital structure. We do not support the existence of non-voting shares.” ACSI Governance Guidelines, December 2023 Council of Institutional Investors (CII, US): “One share, one vote is a bedrock principle of good corporate governance. When a company taps the capital markets to raise money from public investors, those investors should have a right to vote in proportion to the size of their holdings. A single class of common stock with equal voting rights also ensures that the board of directors is accountable to all of the shareholders. Upon going public, a company should have a “one share, one vote” structure… CII expects newly public companies without such provisions to commit to their adoption over a reasonably limited period through sunset mechanisms” CII “Dual-class stock” webpage, 2024 International Corporate Governance Network (ICGN, global): “Dual-class share structures should be discouraged, and where they are in place, kept under review and should be accompanied by commensurate extra protections for minority shareholders, particularly in the event of a takeover bid.” ICGN Global Governance Guidelines, 2024 |
However, investor practitioner interest in tackling this issue has also surged in recent years. The Investor Coalition for Equal Votes (ICEV) launched in 2022 with $1.3 trillion AuM and, in the two years since then, has more than tripled to just over $4 trillion AuM, gathering support from asset managers and owners around the world.
In 2023 and 2024, the UK’s financial services regulator received a substantial volume of responses from investors in clear opposition to their plans to enable unequal voting rights [9] . And the 2024 proxy season demonstrated an increase in shareholder support for resolutions on governance issues – including those requesting a shift to a one share, one vote structure – across the board [10], against a backdrop of generally falling shareholder support for other shareholder proposals on environmental and social issues.
Since it was formed in 2022, ICEV has been engaging with pre-IPO companies and their advisers, as well as with the investment community and policymakers. As a result, we know that investors are keen to understand how they can better use the stewardship tools at their disposal – including their vote – to encourage companies to shift to a one share, one vote structure. We also recognise that companies are interested in understanding the implications for their relationships with institutional shareholders, should they list with unequal voting rights without a suitable time-based sunset clause.
This report is our answer to these requests. It pulls together the voting policies on DCSS from 31 of the world’s largest investors, both asset owners and managers. Although a spectrum of approaches is taken – from votes against ‘dual-class-enabling’ directors at every company board they sit on, to expressing support for “one-share, one-vote” proposals – what is clear is that institutional investors have strong views on this issue. It is also the case that many investors are strengthening their lines over time, as well as using other escalation activities such as co-filing shareholder resolutions (including on class-by-class disclosure) and statements [11] at Annual General Meetings (AGMs) and other meetings.
About the Investor Coalition for Equal Votes (ICEV)ICEV’s mission is to promote equal voting rights and encourage companies to adopt ‘one share, one vote’ arrangements. We were co-founded in 2022 by Railpen, the Council of Institutional Investors (CII) and several of the largest pension funds in the US. Today, members include US, UK and global investors with a combined $4 trillion assets under management – a number that’s growing all the time. Unequal voting rights are an entrenched issue. So, ICEV’s vision is to bring about capital structures where shareholders have a fair and proportionate voice through their voting rights. |
Members of the Investor Coalition for Equal Votes (ICEV) are united in their support for the ‘one share, one vote’ principle. The purpose of this report is to present the range of approaches taken by investors with respect to DCSS and to provide inspiration for the growing mass of investors who are increasingly concerned about the rise of unequal voting rights and wish to express their perspective accordingly through the use of their vote.
This report provides excerpts of the voting policies of 31 of the world’s largest asset owners and managers. To provide a diverse range of perspectives, the policies of some ICEV members are included alongside those of non-members, and we have also sought to include policies from both asset managers and owners from the US, UK and elsewhere.
We have only been able to include examples of policies which were publicly available at the time of writing this report. However, our conversations with a wide range of investors indicates that the sample we have included accurately represents their perspective. We also note that popular voting guidelines such as the Pensions and Lifetime Savings Association’s (PLSA’s) 2024 Voting Guidelines [12] urge investors to pay careful attention to DCSS and vote accordingly [13]. ICEV’s 2023 report with Chronos Sustainability: “Undermining the shareholder voice: the risk and risks of unequal voting rights” highlighted proxy advisers’ increasingly stringent approaches on DCSS globally [14].
What the proxy advisers say (US benchmark policies, 2024)Glass Lewis: “We generally consider a multi-class share structure to reflect negatively on a company’s overall corporate governance. Because we believe that companies should have share capital structures that protect the interests of non-controlling shareholders as well as any controlling entity, we typically recommend that shareholders vote in favor of recapitalization proposals to eliminate dual-class share structures. Similarly, we will generally recommend against proposals to adopt a new class of common stock. We will generally recommend voting against the chair of the governance committee at companies with a multi-class share structure and unequal voting rights when the company does not provide for a reasonable sunset of the multi-class share structure (generally seven years or less). In the case of a board that adopts a multi-class share structure in connection with an IPO, spin-off, or direct listing within the past year, we will generally recommend voting against all members of the board who served at the time of the IPO if the board: (i) did not also commit to submitting the multi-class structure to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of the multi-class structure (generally seven years or less). If the multi-class share structure is put to a shareholder vote, we will examine the level of approval or disapproval attributed to unaffiliated shareholders when determining the vote outcome” ISS: “Unequal Voting Rights: Generally vote withhold or against directors individually, committee members or the entire board (except new nominees who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights. Exceptions to this policy will generally be limited to: newly public companies with a sunset provision of no more than 7 years from the date of going public: Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; situations where the supervoting shares represent less than 5% of total voting power and therefore considered to be de minimis or; the company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained. |
How can investors’ approaches be categorised?
Individual investors take a wide array of approaches to sanctioning companies for their use of DCSS without a suitable timebased sunset clause. Although there are some nuances, investors’ approaches can generally be categorised as:
- Votes against directors (at the company with DCSS). This includes votes against the Chair of the Board, the Chair of the Nominations/Governance Committee or, indeed, all members of the Nomination/Governance Committee and/or the Board.
- Votes against directors at all companies where they hold a board seat. Some investors follow the CII suggestion of voting against ‘dual-class enabling’ directors, explained by the CII as follows (emphasis our own):
“Unequal structures generally render low-vote shareholders powerless to exert direct accountability on board members who facilitated dual-class structures at the critical juncture of the IPO. However, by voting against or withholding support from these same individuals at other, singleclass boards on which they sit, investors can bring some degree of accountability. This voting strategy is not solely about retribution, but also about improving director diligence during the pre-IPO process; widespread adoption of ‘porting’ opposition to other company boards could cause private company directors to more carefully consider all sides of the issue before acceding to founders’ and/or company-retained advisors’ preference for long-term entrenchment [15].”
- Votes in favour of relevant shareholder proposals. Several companies with DCSS annually face a shareholder proposal requesting a recapitalisation to a one share, one vote approach. There is also growing momentum behind resolutions on class-by-class vote disclosure, where companies are asked to present voting results disaggregated by share class [16].
- Votes against capital resolutions at DCSS companies. Although not explicitly articulated in a publiclyavailable voting policy at the time of writing, some investors are beginning to vote against capital resolutions (e.g. share buybacks, share issuance) of any type at companies with DCSS.
The very nature of the issue means that even when all independent shareholders vote against management in a particular way, company management are at liberty to downplay these shareholders’ views. That doesn’t mean however that investors should stop using their vote as a public expression of their view on DCSS – as they would on any other issue that is material to company performance and therefore matters for their clients and beneficiaries.
Some investors may feel that the best approach for them remains to focus on the use of their vote to flag their unhappiness with DCSS. However, ICEV encourages investors who are seeking further influencing approaches to join our growing ranks of asset owners and managers that are undertaking alternative as mechanisms for effecting change alongside continuing to express their concerns around DCSS through their voting behaviour [17].
A link to the full report can be found here.
1ICEV and Chronos Sustainability’s November 2023 report: “Undermining the shareholder voice: the rise and risks of unequal voting rights” explores and summarises this evidence.(go back)
22024-1H-Dual-Class-Report.pdf(go back)
3In 2024, the UK’s Financial Conduct Authority (FCA) implemented proposals that would allow companies to list with unlimited DCSS on the new standard segment. Unlike in other jurisdictions with DCSS, which have strong court-based protections, or have implemented rules about the ratio of the unequal voting rights, no such safeguards have been implemented in the UK, though a nod was made to class-by-class vote disclosure, as suggested by Railpen in its submission to FCA consultation CP23/31.(go back)
4Through the EU Listing Act and implementation by the European Securities and Markets Authority (ESMA) and member states EU Listing Act Has Been Adopted: Countdown to Application Has Started – Hannes Snellman.(go back)
5In the late 2010s, stock exchanges and markets including China’s STAR market, the Hong Kong Stock Exchange and Singapore shifted to allow the use of DCSS, although evidence seems to show limited success in boosting IPO numbers.(go back)
6Please see “Undermining the shareholder voice: the rise and risks of unequal voting rights” for a summary of this evidence.(go back)
7ICEV considers a sunset clause of seven years or less after IPO to be suitable. This builds on the evidence base outlined in “Undermining the shareholder voice” (ibid.) which shows that any benefits with DCSS decline within only a few years after listing.(go back)
8CII is also ICEV’s Vice-Chair.(go back)
9PS24/6: Primary Markets Effectiveness Review: Feedback to CP23/31 and final UK Listing Rules | FCA(go back)
10The 2024 Proxy Season in 3 Charts | Morningstar(go back)
112024 Meta proxy statement: meta-20240329.(go back)
12Stewardship and Voting Guidelines 2023 (plsa.co.uk).(go back)
13ICEV Report 2023: Undermining The Shareholder Voice (railpen.com)(go back)
14Ibid.(go back)
15Dual-Class Enablers (cii.org)(go back)
16See CII’s Policies on Corporate Governance, which in 2024 were updated to take account of CII members approving in September 2024 an amendment to Policy 4.4 which asks companies to “break down voting results by each share class” instead of just providing aggregate totals.(go back)
17This is why ICEV’s primary mechanisms for influence are engaging with the pre-IPO community (companies themselves and their advisers) as well with policymakers, to persuade companies at a stage where they are open to listening to the institutional shareholder voice and to help create a policy environment which hinders, not helps, the growth of DCSS. Accordingly, some investors are increasingly considering incorporating the CII dual-class enablers list into voting policies to help them vote against such directors at all the companies for which they are a director.(go back)
