Canada’s powerful coalition of major institutional investors is calling on companies with dual-class shares to voluntarily limit the power of their controlling shareholders with measures that include caps on the number of directors they can elect.
The Canadian Coalition for Good Governance, which represents large institutional shareholders who collectively manage $2-trillion in assets, has issued a new set of guidelines for dual-class share companies, saying they should at least impose more restraints on holders of multiple voting shares if they insist on creating unequal voting structures.
“The key is to make sure it’s not 100-per-cent control – make sure the public shareholders have some ability to have directors on that board and have a say,” CCGG executive director Stephen Erlichman said.
The guidelines are intended primarily for new companies planning initial public offerings, although the coalition said it hopes to convince existing dual-class share companies to adopt them.
CCGG’s initiative follows a string of dual-class equity listings in the U.S., primarily among large technology companies, such as Google Inc., Facebook Inc., Groupon Inc., Zynga Inc. and LinkedIn Corp. That has prompted the CCGG to try to pre-empt such a trend in Canada, Mr. Erlichman said. The proposals aim to “strike a balance” between the coalition’s general disapproval of dual-class shares and the reality that some companies are committed to them.
Among its guidelines, the CCGG wants holders of dual-class shares to elect directors to the board in proportion to their voting control or elect no more than two-thirds of the board, whichever is less. But if the holders of the shares are managing the company or have a relationship to people managing the company, they shouldn’t be allowed to elect more than one-third of the board.
The CCGG also wants holders of multiple voting shares to have a “meaningful” equity ownership stake in the company and asks companies to disclose a plan for when their dual-class share structure will come to an end.
About 14 per cent of companies comprising Canada’s S&P/TSX composite index had shares with unequal voting rights in 2012, including firms such as Rogers Communications Inc., Power Corp. of Canada and Teck Resources Ltd.
Because dual-class share companies have controlling shareholders, members of the CCGG cannot easily compel change or replace directors at those companies.
But Mr. Erlichman said some of the CCGG’s members could be less inclined to buy their shares or participate in new initial public offerings if they do not meet the guidelines. CCGG’s members include most of Canada’s largest pension funds, as well as mutual funds and other money managers.
“I think the ultimate leverage is whether our members will purchase shares of these companies, and that’s the ultimate risk these companies are taking,” he said.
Mr. Erlichman said members of the CCGG are not united in their views on dual-class shares, but that a “vast majority” of members support the new guidelines.
The CCGG’s policy also urges companies to refrain from paying holders of multiple voting shares anything extra when they convert these holdings into regular shares, which has been a controversial issue in Canada. Shareholders protested a 2010 decision by Magna International Inc. to pay a massive 1,800-per-cent premium to company founder Frank Stronach when he agreed to convert his multiple-voting shares into ordinary shares.
The CCGG says owners of multiple voting shares should also own a meaningful equity interest in the company, with the definition of “meaningful” varying depending on the context. A four-to-one ratio between voting control and equity ownership is a general guideline.
The coalition also wants companies to publicly report when they envision their dual-class structure will come to an end – such as when the founder of the company is no longer running the business, or when foreign ownership restrictions are removed.