Masters thesis
Graduate Student, Liberal Arts College & Gies College of Business (UIUC)
Project Focus: Writing, Qualitative Research, Case Study, Business Strategy
Background
I pursued and was awarded a Master of Arts degree in European Union Studies with a graduate minor in Corporate Governance and International Business from the MBA program. As partial fulfillment of my degree, I wrote and defended a Thesis on corporate share structures.
The problem
During my studies, there were a number of technology companies being scrutinized by shareholders on their corporate governance practices. Of particular note in this area, I saw a lack of research in academic and business literature covering dual class shares. This topic had become a hot button issue and yet it wasn't being talked about or analyzed against the backdrop of policy-making entities within the EU and US.
The idea: My thesis analyzed how dual class shares were being handled in the EU and US. I looked at share classes from a variety of angles, including cultural and business precedent, rule making from the US government, the European Parliament, EU member country governments, regulatory agencies, and stock exchange policies.
The challenge
Dual-class stock can often separate voting rights from equity rights. At the heart of the one share-one vote debate is shareholder democracy.
Are the US and EU as different as we thought on shareholder voting rights?
Shareholder wealth maximization has been at the center of corporate governance best practice in the US. Meanwhile, the EU has a history of family block-holders and ownership structures that are more highly concentrated, taking power and arguably, value away from shareholders.
Although these share structures do not take away from the popularized notion of shareholder primacy and its support in the EU, corporate governance models in the EU have not always been leveled as the most ardent champions of shareholder protection. I wanted to see if this was true or false.
Research methods
Companies reviewed
Additional factors
My research employed a qualitative methodology and was based on the pragmatic paradigm. Through centering my data gathering in this way, I was able to mix methods within the qualitative framework, focusing on the real-world utility of my data findings.
In choosing qualitative analysis, I was better able to consider multiple variables and notate potential alternative business incentives not noted in prior research.
I reviewed securities laws and guidance relating specifically to shareholder voting rights. Additionally, the inclusion of a case study was used to focus my research question and capture how public firms currently issuing shares for trading have used and disclosed dual-class shares and voting rights.
Twenty-four firms were reviewed and analyzed against eight corporate governance provisions considered industry best practice.
*Companies included in case study.
Underlying values
There were additional values that served to color ongoing debate on shareholder voting rights, including the ethical, moral, political, and economic value of votes.
-
OECD’s Principles of Corporate Governance states shareholders’ right to vote should be protected, toeing the line between contract and fiduciary duty.
-
Shareholder needs are varied and so they are responsible for protecting their interests based on individual preferences.
-
The relational and reciprocal dynamics between firms, shareholders, and stakeholders impact policy and vice versa; thus they can quickly tie themselves to local, regional, national, and supranational themes.
-
Driven by the Efficient Market Hypothesis, markets operate on all information available to determine price (i.e. value) of a company’s stock.
The TLDR?
Results showed dual-class shares do not necessitate disproportionate voting rights, single class stock can yield disproportionate voting rights among shareholders, and that policymakers, scholars, and institutional investors have not reached consensus that one share-one vote is a best practice or that provisions safeguarding minority shareholder voting rights are in a firm’s best interest.
In each case of US firm dual-class usage, their strict adherence to disproportionate voting rights may be a partial reaction to decreased influence over firm decisions. Whereas my case studies examining firms in the EU with dual-class shares have results that signal different applications of dual-class shares and usage of other control enhancing mechanisms.
Dual-class shares are not indicative of bad corporate governance practices.
There were only a few companies that had questionable minority shareholder protections and business practices.
Many firms with a single class of stock had engaged in other corporate governance practices that could be argued as being questionable.
Legal frameworks
The EU
After taking a full appraisal of EU level Regulations and Directives applicable to dual-class shares and one share-one vote, it quickly became apparent that many of the existing rules run alongside dual-class shares, but don’t directly address them as being taboo or unethical.
EU Member States have shown dedication towards creating corporate governance codes and applying best practices. Fifteen codes spoke directly to the use of voting rights, but by and large, the codes have only emphasized the disclosure of rights.
The US
The US has taken decisive action towards closing loopholes and creating more stringent penalties for companies after corporate scandals with the passage of Sarbanes-Oxley in 2002 and Dodd-Frank in 2010.
However, The JOBS Act eases cumbersome disclosure rules and if it is any indication, there seems to be a slight schism between creating a safe and sound marketplace through disclosures and lessening the regulatory burden that may be particularly tough for SMEs and startups
“Efforts to ensure that shareholders are
provided with sufficient rights are only relevant if shareholders actually exercise these rights....[A]s already indicated many shareholders do not.... Rather they rely on others to provide effective monitoring.”
Getting down to brass tacks: Dual-class shares persist
Neither the EU nor the US outright ban the usage of dual class shares.
Where interest in improving corporate governance is increasing within EU institutions, laws out of the US reflect a desire to close loopholes. However the US does not share the EU’s desire to create a corporate governance dialogue.
Where does this leave shareholders?
Some would say that shareholder rights regulations at the EU supranational and US federal levels are already moving in a direction towards convergence within their own jurisdictions.
On this point alone, harmonizing rules within the EU and US first, would be a logical first step towards securing clarity in corporate governance practices.
Case study
I analyzed twenty-four firms across four industries. These firms held slightly different market positions from each other, but generally performed well financially and had positive market outlooks. My review yielded a few key findings.
Loyalty shares
The French Commercial Code allows companies to issue double voting rights, known as “loyalty shares,” where it can be proven that a share has “been registered in the name of the same shareholder for at least two years” according to reference 73. France’s application of double voting rights for shares that have been held for two years or more is a clear example of alternatives to multiple share classes. In France’s case, Loyalty Shares are used to reward a long-term mindset in shareholders.
Accounting standards
The study found a strong split between accounting standards used in EU and US firms, the former using IFRS and the latter using US GAAP. Different accounting standards highlighted a potential impact to voting right disclosures. US GAAP does not consider potential voting rights when analyzing the influence that an investor might have, however IFRS does consider potential voting rights attached to an investor and how they might exert control over an investee.
Therefore, impact of shareholder influence from those with voting rights may not be correctly captured or understood.
Board elections
A majority of EU companies use 3-year Board terms and prefers to use Board elections as a method for maintaining control within the firm. Whereas a majority of US companies have annual reelection of Board members. There is a case to be made for protecting business interests against short-term oriented investors after new legislative acts such as Dodd-Frank have given shareholders a greater role in firm oversight and influence. Dodd-Frank has given shareholders the ability to nominate their own director choices at an annual general meeting, moreover it would also give shareholders the right to propose rules regarding director nomination.
Conclusions
Across the EU and US, the prevailing corporate governance policy is disclosure.
Governing authorities have implemented laws in the EU and US, which demand the creation, dissemination, and access to firm financials, their share structure, and corporate governance practices. In gathering company information on the firms selected for my case study, it was apparent very quickly that the EU and US have taken their own paths towards harmonizing information disclosure and how investors may access this information.
Varying corporate governance standards across the EU and US have not ensured an equal application of one share-one vote nor multiple voting rights or dual-class shares.
The case studies showed that a variety of corporate governance factors might be important to consider beyond the votes given to a share.
Next steps
When we look at EU and US corporate governance policies alongside their use of multiple voting rights, one share-one vote has yet to be accepted by policymakers, regulators, or firms across the Atlantic as an undisputed best practice. Both the EU and US corporate governance systems are changing, but not converging and no single winner emerges as there are failings on both sides. Given the uncertainty around a future convergence of policy, it is clear that there are a variety of standards and opinions that investors and stakeholders must take into consideration when considering investment.
Want to dig deeper?
If you’d like to read the thesis in full with data insights and references, you can download a free digital copy through UIUC publishing.
Final thoughts
Impact to the literature
Through my research, I was able to establish a baseline set of findings from the comparison of dual class share policies across two very large, dynamic, and market-making jurisdictions, the EU and the US. In doing this, I contributed uniquely new learnings and filled a gap in the literature by adding contextual insight that advanced knowledge of how the EU and US look at one share-one vote policies, vis à vis dual class and multi-class share structures.
Challenges during research
Due to the nature of my research question, selecting companies that fit my selection criteria across all parameters became difficult.
It was important to the legitimacy and ethics of my research to be as fair as possible given constraints. In order to best combat selection problems, I used data triangulation to consider other information gathered to support or explain my findings. The data used for this triangulation came from the legal documents, SEC rules, and firm information provided through annual filing documents and investor information. Through adding triangulation, I was able to capture multiple perspectives at play when a firm issued its shares for listing and this added context to possible data inconsistencies.