Dual-class structures magnify the success or failure of management.Getty Images/iStockphoto
The dual-class share structure that's stirring controversy at Bombardier Inc. and Alimentation Couche-Tard Inc. has been a runaway winner for many shareholders in Canada.
Canadian stocks with unequal voting rights, often used by families to control companies with only a minority stake, have posted annualized returns of 12 per cent over the past 10 years, almost double the 7.1-per-cent return of their single-class peers, according to data compiled by Bloomberg.
The results suggest this dual-class structure magnifies the success – or failure – of management entrusted with control. When stocks with a dual-class structure work, they really work, and both investors and management reap the rewards, as in the case of retailer Couche-Tard, one of the top gainers. When they don't, you end up with a Bombardier, whose stock has posted an annualized loss of 5.2 per cent over the past decade, the data show.
"It's a leveraged play on management," said Craig Fehr, Canada market strategist at Edward Jones, in a phone interview from St. Louis. His firm manages about $876-billion (U.S.). "The dual-class shares just amplifies this. It's a function of the confidence you have in management."
Debate over dual-class shares has intensified in Canada this month. Bombardier rejected an initial offer of aid from the federal government after law makers demanded changes to Bombardier's corporate governance, including the share structure. Talks continue with Bombardier, which reported first-quarter results Thursday and holds its annual meeting Friday. Alain Bouchard, the executive chairman and co-founder of Couche-Tard, has faced resistance from shareholders in his attempts to remove a clause eliminating the company's dual-class structure once the youngest of the founders turn 65.
Couche-Tard spokeswoman Karen Romer didn't respond to requests for comment.
Bombardier has no plans to change its share structure, spokeswoman Isabelle Rondeau said in a phone interview.
A spokesman for a Navdeep Bains – the minister for innovation, science and economic development who is Prime Minister Justin Trudeau's pointman in Bombardier talks – declined to comment on whether the dual-class shares are a part of negotiations.
"The discussions are ongoing. We will not be commenting on content of these discussions," press secretary Philip Proulx said in an e-mail Wednesday.
The share strategy, designed to concentrate voting control within a minority of shareholders, in many cases a family, is used by about 12 per cent of 235 companies in the S&P/TSX composite index. That compares with about 6.7 per cent of companies in the U.S. S&P 500, including Facebook Inc. and Alphabet Inc. The U.S. stocks have been even better performers, with an average annualized return of 13 per cent over the same period, the data show.
This control gives management more leeway to act with long-term goals in mind, said Izabel Flis, an analyst at Franklin Bissett in Calgary. Couche-Tard is a significant holding in its flagship $2.9-billion (Canadian) Canadian Equity Fund. "They have an incredible track record of creating value," Ms. Flis said. "Knowing they have control motivated them that much more."
The results in Canada include more than ninefold returns for label maker CCL Industries Inc. in Toronto, the top-performing stock in the group; a sevenfold gain for technology firm CGI Group Inc. of Montreal; while Prem Watsa's Toronto-based insurer Fairfax Financial Holdings Ltd. has surged sixfold. Other companies with these structures include media firms Rogers Communications Inc. and Shaw Communications Inc.
The Keevil family's Teck Resources Ltd. and Bombardier under the Beaudoins have the two worst returns, dropping more than 41 per cent in that time on a total-return basis. Convenience store operator Couche-Tard has been among the best with a 532-per-cent return in 10 years.
Bombardier has been under the control of the Beaudoin family since Laurent Beaudoin, son-in-law of founder Joseph-Armand Bombardier, took control in 1966, according to Bombardier's website. Successive generations of the family have guided the company including Pierre Beaudoin, a grandson of the founder.
Mr. Bouchard, who stepped down as CEO of Couche-Tard in 2014, sought to remove a clause postponing the removal of the company's dual-class structure at the company's annual meeting last September. Instead of kicking in when the youngest of the founders turns 65, the proposed revision would have the dual-class structure eliminated either when none of the founders was a director or if the founders and their families no longer held 50 per cent voting rights. The motion was withdrawn as it lacked the necessary voting support from shareholders, the company said.
Couche-Tard's example shows investors needn't rail against dual-class shares in every instance, said David Beatty, the founding managing director of the Canadian Coalition for Good Governance and a professor of strategic management at the University of Toronto's Rotman School of Management.
"If you look at the return to the shareholders of having that controlling group continue on, I think the best and most prudent way to carry on is to leave them in control," he said, in reference to Couche-Tard. "The largest institutional investors have this religious dogma that one share, one vote is the only way to manage the affairs of a publicly traded corporation."
Family-controlled businesses that are passed down to successive generations can pose a problem when the heirs aren't as talented as the originators, who may have deserved that shareholder trust, said Douglas Cumming, a finance professor at York University's Schulich School of Business.
"That's the 'idiot heir' problem," he said. "It's a problem when the people with the dual-class control are no longer the same people you started with. It's reasonable you should revisit that dual-class structure when that happens."