Council of Institutional Investors

Dual-Class Stock

CII's corporate governance policies endorse the principle of "one share, one vote": every share of a public company's common stock should have equal voting rights. When a company goes to the capital markets to raise money from the public, equity investors with the same residual claims should have equal protections and rights, including the right to vote in proportion to the size of their holdings. Classical principal-agent risks are exacerbated for investors when equity structures skew the alignment of ownership and voting rights, which is why the "one share, one vote" principle has been a core focus for CII since its founding in the 1980s.  

The vast majority of U.S. publicly traded companies (about 9 in 10) have a "one share, one vote" structure. Other companies typically create a superior class of common stock with more votes per share than an inferior class, with founders, their families or other insiders holding the superior class. The ratio most frequently employed is 10 votes per superior share to 1 vote per inferior share, although a troubling number of newly public companies have shown a fondness for even more egregious ratios and more than two classes. Unequal structures are becoming more "innovative," but the end result remains the same: unchecked control for holders of the superior class. In 2016 CII adopted a statement underscoring an expectation for newly public companies to respect the "one share, one vote" principle, and if companies have already adopted a multi-class structure, we expect them to phase it out through sunset mechanisms. 

There are formidable impediments to broadly addressing the problem of unequal voting rights. Stock exchnages could address the problem, but competition to attract new listings puts "race to the bottom" pressure on listing standards. The Securities and Exchange Commission faces challenges over statutory authority. A federal suit brought decades ago by the Business Roundtable established judicial precedent against the SEC taking action.  

In this context, index methodology has emerged as a path forward. Following the egregious no-vote IPO of Snap Inc. and requests by CII and other concerned investor groups, three major index providers opened public consultations on their treatment of no-vote and multi-class structures. The FTSE Russell consultation resulted in a decision to exclude past and future developed market constituents whose free float constitutes less than 5 percent of total voting power. S&P Dow Jones' consultation resulted in a broader, but only forward-looking exclusion, which bars the addition of multi-class constituents to the S&P Composite 1500 index and its components, covering the S&P 500, MidCap 400 and SmallCap 600 indexes. MSCI's consultation concluded on August 31; a decision remains pending.  
 
Resources & Advocacy
May 10, 2017 Does Multi-Class Stock Enhance Firm Performance?
Executive Summary | Full Study
April 10, 2017 CII Podcast: Why Indexes Should Say "No" to Non-Voting Shares
 
Correspondence
August 4, 2017 CII letter to Hong Kong on New Board concept paper
August 3, 2017 CII to MSCI responding to consultation on the treatment of no-vote shares
June 20, 2017 CII letter to Blue Apron on its triple-class structure
April 27, 2017 CII submission to S&P Down Jones consultation on no-vote shares 
Mar. 29, 2017 CII letter to Singapore Stock Exchange on preserving one share, one, vote listing standard
Mar. 29, 2017 CII letter to MSCI requesting public consultation on index eligibility of dual-class companies 
Mar. 24, 2017 CII letter to FTSE/Russell requesting public consultation on index eligibitliy of dual-class companies
Mar. 9, 2017 Testimony before the SEC Investor Advisory Committee on Snap
Feb. 3, 2017 CII letter to Snap on its capital structure with no voting rights for public investors
Aug. 20, 2014 CII letter to Swift Transportation on shareowner proposal calling for one share, one vote
Aug. 12, 2014 CII letters to Cablevision SystemsDonegal GroupFacebookFordGoogle and Spirit AeroSystems on shareowner proposals calling for one share, one vote
March 27, 2014 CII letter to NYSE requesting one share, one vote listing standard
March 27, 2014 CII letter to NASDAQ requesting one share, one vote listing standard
March 27, 2014 CII letter to the London Stock Exchange on preserving one share, one vote listing standard
March 27, 2014 CII letter to the Hong Kong Exchange on preserving one share, one vote listing standard
Dec. 10, 2012 CII follow-up letter to NYSE meeting
Oct. 2, 2012 CII letter to NYSE requesting one share, one vote listing standard
Oct. 2, 2012 CII letter to Nasdaq requesting one share, one vote listing standard
 





 

Download CII's list of dual-class companies

The Rise of No-Vote Shares
A growing number of companies are adopting triple-class share structures that include a separate class of stock that offers shareholders no voting rights at all. Snap Inc. was the first company in recent years to make its initial public offering (IPO) with just non-voting shares. Other young companies, including Blue Apron and Altice USA, are going public with triple-class capital structures that include a class of non-voting stock in reserve.
 
No-vote shares are a full-scale repudiation of the “one share, one vote” principle that is core to good corporate governance. Though such shares legally are equities, they function more like subordinated partnership units; holders get a stake in the returns, whether positive or negative, but little else. Non-voting shares rob shareholders of the means to hold management and boards accountable. They amount to a perpetual-control device that lets founders hang onto their power over the company even as their economic stake shrinks. Yet many investors who use indexing strategies will indirectly invest in Snap and any other company that issues non-voting shares if major index providers provide these share classes to be included in their indexes.
 
CII and many investors believe no-vote shares have no place in public companies, and we are pushing back. CII asked leading index providers FTSE/Russell, MSCI and Standard & Poor’s to exclude Snap (and future companies with no-vote shares) and explore measures to incentivize the adoption of the "one share, one vote" principle. All three launched public consultations on this issue. FTSE/Russell's consultation resulted in the exclusion of companies whose free float shares constitute less than 5 percent of total voting power. S&P Dow Jones' consultation resulted in the exclusion of multi-class companies from the Composite S&P 1500 index and its component indexes, including the S&P 500, MidCap 400 and SmallCap 600 on a going-forward basis.

U.S. stock exchanges could bar zero-vote companies through their listing standards, but they have not acted. CII continues to advocate for listing standards that promote the “one share, one vote” principle at U.S. and non-U.S. exchanges. To learn more, listen the CII podcast.