Catherine McCall is the executive director of the Canadian Coalition for Good Governance, which represents institutional investors that together manage approximately $5-trillion in assets on behalf of pension funds, mutual fund unit holders, and other institutional and individual investors.
Why care about Rogers?
The Rogers family drama has been occupying headlines in Canada and farther afield for the past fortnight. Interest extends far beyond the business pages as Canadians are fascinated/enthralled by our very own Succession story. It is easy to see why those Canadian investors who hold the non-voting shares that supply most of the capital but who have no voice in the current dispute are watching closely. But apart from some diverting gossip (a family photo with Donald Trump!), why should anyone else care what happens at a family dynasty, even one that has controlled a major Canadian company for more than 40 years?
Simple answer: because what happens at companies such as Rogers affects the well-being of a great many Canadians.
The investing public includes anyone saving for retirement or education through mutual funds or ETFs, anyone with a pension and anyone who receives or will receive CPP – the majority of Canadians in other words.
The increased and growing focus in recent years on environmental, social and governance matters (or ESG) has given companies and investors a better understanding of the interplay between such factors and the health of a corporation. The creation of sustainable long-term value requires incorporating the interests of all corporate stakeholders: employees, customers, the broader community and the environment. These stakeholders also have a lot to lose when a company fails because of poor governance.
The threat to stakeholders’ well-being can be traced to Rogers’s dual-class share structure, a corporate form in which different classes of shareholders hold voting power disproportionate to their equity contribution. In these structures a key accountability mechanism is missing. At Rogers, the lack of accountability is particularly egregious because the class of shares held by the public is entirely non-voting. Shareholders, who have contributed more than 70 per cent of Rogers’s equity, have no say in the election of directors or any of the other rights we normally associate with share ownership because the Rogers family controls 97.5 per cent of the voting power. So, we are left with the untenable result that the composition of a public company board is being determined by a court.
The common argument in support of dual-class share structures goes like this: Without the ability of the founder to maintain control, the company would not be brought to the public market in the first place but instead kept private, thereby robbing public shareholders of the chance to participate in the value creation that the leader’s talent and skills make possible. Dual-class shares protect the leader from opportunistic takeover bids and external short-term market pressures that would prevent the long-term focus necessary to fulfill the visionary strategy.
Supporting this is the “buyer beware” argument that, because of the comprehensive disclosure required by securities regulation, shareholders who buy shares with subordinate voting rights do so with full knowledge and should be free to do so in a free market.
The logic is less compelling when one notes the dominant role that passive index investing plays in today’s capital markets. Many ETFs and pension funds, for example, are required to hold a certain portion of invested capital in TSX Composite and TSX 60 indexes in which a significant number of companies have dual-class share structures.
The most powerful argument against dual-class share structures is that they violate the principles of fairness and accountability on which our capital markets depend. They result in entrenched leadership, weak boards, cronyism and nepotism, and interfere with a free market for control. The principle of one share/one vote, on the other hand, helps to ensure that corporate leadership is accountable to the investors who provide financial capital.
Investors can only enhance and protect the long-term value of their capital if they have an eye to protecting the interests of the other stakeholders that provide the human and physical capital that are necessary to making investments sustainable.
The lack of accountability at Rogers is not a peripheral issue for Canadians.
But dual-class shares companies are a fact of life in Canada. So, what can be done to help ensure accountability? The Coalition for Good Governance has long advocated for certain conditions to be attached to dual-class shares to protect the investing public. Perhaps the most significant of these is a sunset provision where the dual-class structure dissolves after the passage of a certain amount of time or on the occurrence of a certain event, for example, the death of the founder. Alternatively, a sunset clause could take the form of periodic shareholder approval of the continuation of the dual-class structure, say every five years.
Other conditions set out in our policy that are intended to introduce accountability into dual-class share structures include a prohibition on the hedging of multiple-voting shares and a coattail, which enables subordinate voting shareholders to participate in a takeover bid on the same terms as the multiple-voting shareholders.
Regulators should mandate that these conditions be attached to any dual-class IPO. Existing companies should be encouraged to adopt such conditions and, at the very least, those that do not should disclose to shareholders annually why they believe that the conditions should not apply to them.
Finally, regulators should prohibit non-voting shares, such as those we see at Rogers.
It’s the right thing to do.
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