SNC-Lavalin interim CEO Ian Bourne speaks to shareholders Thursday, May 3, 2012, at the company's annual general meeting in Toronto.Fred Thornhill/Reuters
In the past decade, the number of U.S. companies with controlled share structures has climbed higher, but a new study found their investors sometimes suffer from it.
The research, conducted by the Investor Responsibility Research Centre Institute, a U.S. research firm focused on corporate responsibility and investing, determined that of all the share structures, companies with multiple classes of shares only outperformed their peers when analyzing returns over one year, and fell short over three-, five- and 10-year terms.
The results get more complicated when companies with a single class of controlling shares are studied independently, but even then, multiclass structures underperform. Over 10 years, for example, single-class controlled firms returned 14 per cent, non-controlled firms generated about 10 per cent gains and those with multiclass structures offered just 7.5 per cent returns.
It's an important issue today because controlled companies are experiencing a bit of a renaissance, driven by tech companies that favour this structure. A decade ago, the S&P 1500 had 87 companies with controlled shares. Today there's 114. Of these, 79 have multiple classes of shares and 35 are controlled by a single class of voting shares.
The biggest fear, at least from the IRRC's perspective, is the growth of companies whose leaders control votes but have little equity at stake. Examples include Zynga Inc., Groupon Inc., and Facebook Inc. all of which tanked after their IPO. Are investors really better served by this structure (which theoretically should encourage less distraction for management, and longer-term thinking), or is it simply a power grab? In these cases, investors are clearly suffering.
At Telus Inc. (a company with multiple share classes, although without a controlling shareholder) arguments surrounding its dual share structure have heated up over the past few months. Telus and activist investor Mason Capital disagree on Telus's plan to unite its two classes of shares - one voting, one non-voting - on a one-to-one basis. Telus shares haven't suffered significantly as a result, though.
But it's not just returns and equality that's at stake. The study also found that controlled companies with a multiple classes of shares "exhibit materially more share price volatility than non-control companies."
Within the S&P 1500, the consumer discretionary sector has the highest number of controlled companies, with 43. Industrials rank second highest, with 19.