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The Duel Over Dual-Class Shares
I wish I could say we saw it coming — in fact, I
can say that.

By Jim Kristie

Directors & Boards has had, over its now 36 years of publication, a legacy of seeing around corners on burgeoning issues in corporate governance. Here is a recent example.

In January of this year Charles Elson and I started kicking around the idea of a panel discussion on dual-class stock. This is a provocative subject in corporate governance, and we thought we could bring some fuller attention to the implications for management, the board, and investors involved in companies with dual-class share ownership.

Over the next couple of months we recruited a smartly composed panel of thought leaders from the corporate world, law, academia, the media, and the institutional investor community. In April we all gathered under the auspices of Prof. Elson’s Weinberg Center for Corporate Governance at the University of Delaware to hash out the tradeoffs in having a dual-class capital structure.

The discussion resulted in the article, “Dual-Class Stock: Governance At the Edge,” in the Third Quarter issue of Directors & Boards.

Just as this issue was on its way to subscribers there was big news on the dual-class stock front.

The Council of Institutional Investors publicly urged the New York Stock Exchange and Nasdaq to make new companies that have two or more classes of common stock with unequal voting rights ineligible for listing. Ann Yerger, the Council’s executive director, was a panelist for the Weinberg Center discussion. More details on the Council’s bully-pulpit initiative can be found here.

Also, a new study was released that found that controlled companies — particularly those with multiple classes of shares — generally underperform over the long term. They experience more stock price volatility, increased material weakness in accounting controls, more related-party transactions, and offer fewer rights to unaffiliated shareholders. The study was commissioned and funded by the Investor Responsibility Research Center Institute and conducted by ISS. Click here for a copy of the study.

So it was a forward-looking decision 11 months ago to focus on dual-class share ownership for both the panel discussion and just-published follow-on article.

In this month’s e-Briefing, we give you a taste of both sides of the debate. In the Article of the Month, corporate director Mike Cook takes the “pro” side. In the Columnist slot, Fidelity’s Scott Goebel weighs in with an institutional investor’s cautionary view.

The study cited above indicates that the number of controlled companies is on the rise. We’re all seeing dual- or multi-class share ownership built into high-profile tech companies that have gone public — Facebook being a prime example this year — as well as other kinds of enterprises, such as the sports organization Manchester United, which went public with dual-class stock on the NYSE in July.  And a dual-class ownership structure has been a continuing sore point for shareholders of several companies, including the Rupert Murdoch-controlled News Corp.

So this is a topic that is likely to have continuing legs. If you would like a copy of the full article “Dual-Class Stock: Governance at the Edge,” which contains both Mike and Scott’s viewpoints as well as the pro and con positions of our nine other panelists, email me at jkristie@directorsandboards.com.

As always, I welcome your comments.

Jim Kristie is the editor and associate publisher of Directors & Boards.


 
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