The recent outbreak of insanity at Rogers Communications set off a barrage of commentary blaming the struggle for control of the company on, of all things, its dual-class share structure. Which is to say, people who were always against dual-class shares to begin with seized on the Rogers mess in support of their prior convictions. Are they right?
The bones of the syllogism are certainly there. The split among the company’s controlling owners, members of the family of its late founder, Ted Rogers, is most assuredly messy. At the height of the conflict the company was left with two different chairs elected by two different boards of directors.
And Rogers does indeed have two classes of shares, voting and non-voting, through which the family, though it owns less than 30 per cent of the company’s equity, controls 97.5 per cent of the voting stock. It’s the ergo that’s in question here. Is Rogers a mess because of its dual-class shares? And if it were, would that be enough to make the case against them?
Rogers is hardly unique in this regard, after all. At last count, 90 companies on the Toronto Stock Exchange had two or more classes of stock, many of them family-controlled companies like Rogers. A quarter of new listings on the New York Stock Exchange so far this year have had some sort of multiple-class share structure. Most assign the second class of shares a fraction of the votes of the first; Rogers is unusual only in giving them no votes at all.
If dual-class shares were associated with messy family splits we should presumably have seen more of them. But in fact this sort of thing is extraordinarily rare. Most of the time dual-share companies tick along just fine – according to some studies, better than companies with more conventional share structures.
For example, over the last twenty years, the price of Rogers’ non-voting B shares has grown by over 360 per cent, nearly twice as fast as the market average. Dual-share companies in Canada include such household names as Canadian Tire, Magna International and Shopify; in the U.S., Alphabet (parent company of Google), Ford and Berkshire Hathaway.
That so many companies have taken to issuing these shares suggests there is a ready market for them. Which poses a puzzle for the critics: If non-voting or subordinate voting shares are such a bad idea, why are people so eager to buy them? No, they don’t get to vote at the company’s annual meeting. But they do get to collect their share of the profits. They also have less defence in the event the company’s controlling shareholders lose their minds. But it seems a risk many find worth taking. Who’s to say they’re wrong?
Indeed, they may well be right. It’s easy to see why a company’s founders might prefer to issue subordinate voting or non-voting shares: they get all of the benefits of being a public company, in terms of access to capital, without the risk of losing control. But there’s reason to believe that can be in other shareholders’ interests, too.
Insulated from hostile takeovers or activist shareholders, the founders are free to focus on their own, longer-term vision for the company – and to keep management similarly focused. That’s especially important, ironically, in industries subject to rapid change, requiring a company to make big strategic shifts in a short period of time, which may explain why so many tech companies favour it.
There is plenty of research to show that closely held companies perform better than widely held. Dual class shares may offend against the sacred principle of one share-one vote, but if both sides of the transaction find it to their benefit to put that aside what of it? As long as buyers of the shares know what they are getting into, then another, arguably higher principle is invoked: freedom of choice.
Ah, but do they know what they are getting into? Or, come to that, what they have gotten into? Dual-share companies may be subject to the same rules of disclosure as other public companies, but without the same institutional safeguards or cultural norms these are arguably of less effect. The potential, and the temptation, for abuse of shareholders’ trust is evident.
One lesson from the Rogers experience is that the “independent” directors who are supposed to represent the interests of all shareholders often aren’t and don’t. As chairman of the board, Edward III kicked off the recent crisis by firing the company’s chief executive officer. But the son wasn’t a patch on the father in this department: As owner and CEO, Ted once fired the chairman.
Of course, even if outside shareholders don’t have a voice, they still have a choice: If they can’t vote their shares, they can always sell them. So dual-share companies still face that check on poor performance or inadequate disclosure. Critics wonder how much that still applies, however, in the age of index funds, mandated to buy, and hold, every share in the index.
This is the paradox of passive investing: stock markets would not be “efficient,” incorporating all available information into the price of shares, more or less instantaneously – making it better to buy the market than attempt to beat it – were there not also active investors, buying and selling in precisely that vain hope. But efficient markets don’t depend on everybody buying and selling their shares in response to new information. It’s enough that some do.
It cannot escape notice that some of the loudest voices calling for restrictions on dual-class shares, such as the Canadian Coalition for Good Governance, represent the interests that stand to benefit most from such restrictions: not the small retail shareholder, but pension funds and other large institutional investors. That they should wish to be free to take over, raid, or otherwise exercise influence over these companies is understandable. It’s not so clear why the laws should be drafted to assist them.
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