Council of Institutional Investors

Investor Rights & Protections

Voting rights in proportion to equity & time-based “sunset” provisions for dual-class stock

The principle of one share, one vote is a foundation of good corporate governance and one of the first policies that CII 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.

Founders of these companies say super-voting stock lets them focus on their long-term vision for their companies without having to worry about pressure for short-term results. But this narrative is contrary to the long-term success of numerous one share, one vote companies. No entrepreneur, no matter how charismatic, is infallible. And 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 citizenship. 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 that lets them do as they please with little risk of losing their jobs.

Recent academic research has indicated 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.

We have had some success. Time-based sunsets were extremely rare just a few years ago. In 2020, eight of the 17 U.S. companies that went public on U.S. exchanges with dual-class structures planned to phase out the unequal voting rights over a period of time.

CII supports federal legislation to mandate stock exchange listing standards that require time-based sunsets for new dual-class companies listing on U.S. exchanges. Read more about dual-class stock here.
 

Independent proxy research

 Many institutional investors—regardless of the degree to which they focus on environmental, social or governance 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. Safeguarding the independence, quality, affordability and timeliness of proxy analysis and advice is critical to them.

In 2020, the SEC approved a rule that will inhibit proxy advisory firms in 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. If the lawsuit fails, CII will press the SEC to propose changes to the rule.
 

Right of shareholders to express their voice via proposals on company ballots

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 practice. 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. CII opposed the rule and believes the SEC should revise it. Read more here.

Claw backs of unearned executive compensation

CII believes that 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.

The 2010 Dodd-Frank Wall Street Reform and Consumer Act 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 believes provides a floor for such policies. But the SEC has not taken final action on the rule proposal. Read more here.