Investor Rights & Protections
Voting rights in proportion to equity & time-based “sunset” provisions for dual-class stock
CII is spearheading investor efforts to ensure that companies going public with dual-class stock capital structures incorporate time-based sunset provisions on the super-voting shares.
The principle of one share, one vote is a foundation of good corporate governance and one of the first policies that CII members endorsed. Equal voting rights proportionate to each investor’s share ownership is the predominant capital structure in the market. But, in recent years, a prominent minority of companies going public– from Alphabet (Google’s parent) to Zillow – have embraced dual- or even triple-class capital structures with unequal voting rights.
Typically, founders and insiders lock in their control by issuing themselves a class of stock with 10 votes per share while offering public shareholders a class with only one vote per share. Often over time, this founder-knows-best approach presents increasing risk to long-term investors by entrenching management and blindsiding executives to the need for change.
That lack of accountability at the top can also harm corporate culture and the community at large. Consider the costly blunders by Facebook and Google on issues ranging from data privacy to sexual harassment to perceived political bias. Insiders at both companies have outsize voting power that dwarfs their equity stakes, letting them do as they please with little risk of losing their jobs.
Recent academic research indicates that while dual-class companies have a value premium in the early years after their IPO, over time that evaporates and becomes a discount within six to nine years from IPO. That is why CII presses dual-class companies to incorporate time-based sunset provisions to convert to one-share, one-vote within seven years of IPO, unless all classes of shareholders, voting on a one-share, one-vote basis, approve keeping the dual-class structure.
CII’s campaign for time-based sunsets is gaining ground. In 2021, 43% of the 94 companies that IPO’d with dual-class stock incorporated time-based sunsets. That is up sharply from 2017, when just 26% of dual-class IPO companies had time-based sunsets.
CII stepped up its efforts on this front in the fall of 2021 by submitting draft federal legislation that would prohibit the U.S. listing of companies with multi-class stock with unequal voting rights absent a sunset provision that takes effect within seven years of IPO, unless shareowners of all classes approved keeping the unequal structure. Read more about dual-class stock here.
Ensuring that investors have independent proxy research
Safeguarding the independence, quality, affordability and timeliness of proxy analysis and advice is critical to investors.
Many institutional investors—regardless of the degree to which they focus on environmental, social or governance (ESG) issues—are clients of proxy advisory firms. Pension funds and other institutional investors use proxy advisory firms' research and recommendations, to varying degrees, to inform their decisions about how to vote their shares and conduct their engagements with portfolio companies.
In 2020, the SEC approved a rule that would inhibit proxy advisory firms from doing their jobs and make it more difficult and costly for institutional investors to obtain the proxy research and recommendations. Institutional Shareholder Services (ISS), a leading proxy advisory firm, sued the SEC to overturn the rule and CII and several member funds filed an amicus brief in support of that suit.
In November 2021, under new leadership, the SEC proposed amendments to rescind three key provisions in the 2020 rules that the commission had largely put on hold. These required proxy advisors to: 1) provide their voting advice to the companies that are the subject of the advice; and 2) make clients aware of any written responses by companies to proxy voting advice. A third provision gave examples of misstatements or omissions in proxy voting advice that could be the basis for liability for proxy advisors, if material. CII generally supports the proposed amendments but has urged the SEC to consider simply rescinding the 2020 proxy advisor rules.
Claw backs of unearned executive compensation
CII helped persuade the SEC to reopen consideration of a provision in the 2010 Wall Street Reform and Consumer Protection Act that directed the SEC to adopt a rule to require claw backs of unearned executive compensation in certain circumstances. In 2015, the SEC proposed a claw back rule that CII believed provides a floor for such policies.
Boards should recover previously paid executive incentive compensation in the event of acts or omissions resulting in fraud, financial restatement or some other cause the board believes warrants recovery, which may include personal misconduct or ethical lapses that cause, or could cause, material reputational harm to the company and its shareholders.
In October 2021, the SEC reopened the comment period for proposed rules to implement the claw back requirements in Section 954 of Dodd-Frank. Those rules would require stock exchanges to establish listing standards mandating that listed companies adopt and comply with a claw back policy for recovering executive compensation granted on the basis of erroneous and fraudulent financial statements. The proposed rules also would also require that listed companies delineate the incentive-based compensation that is subject to recovery, disclose any recovery of excess incentive-based compensation and file their compensation recovery policies.
CII, in a November 18 comment letter, acknowledged that many U.S. companies have adopted claw back policies that go further than Dodd-Frank requirements. But CII reiterated support for a baseline rule for all listed companies consistent with the intent of the Dodd-Frank requirements. Read more here.
Right of shareholders to express their voice via proposals on company ballots
CII continues to contest changes to the shareholder proposal rules that the SEC approved in September 2020.
Shareholder proposals permit investors to express their voice collectively on issues of concern to them, without the cost and disruption of waging proxy fights. In practice, shareholders exercise this right on a limited basis; the vast majority of public companies do not receive shareholder proposals. And shareholders rarely file binding proposals, giving companies ample opportunity to respond in a carefully considered way to proposals that pass.
Shareholder proposals have encouraged many public companies to adopt policies that today are viewed widely as best practices. For example, electing directors by majority vote, rather than by a plurality, a radical idea a decade ago when shareholders pressed for it in proposals, is now the norm at 90% of large-cap U.S. companies.
In 2020, the SEC approved a rule making it more costly and difficult for shareholders to file proposals. On Sept. 23, 2021, CII filed an amicus brief supporting a lawsuit challenging the rule. The brief provides historical evidence that shareholder proposals have promoted good corporate governance practices and long-term shareholder value. It also explains that the higher thresholds for resubmitting proposals could make re-filing at dual-class companies impossible in many cases. The lawsuit was filed by the Interfaith Center on Corporate Responsibility, James McRitchie and As You Sow. Read more here.