This article appears in the November 2022 issue of Advisor’s Edge magazine — our second last print issue. If you’re a print-only subscriber, learn more about our digital transition and how to continue to receive all the best news and features on Advisor.ca.
In most companies with multiple share classes, superior-voting shares are held by company founders who use them to control major decisions, even when they have a small ownership position. This generally means investors must choose between purchasing shares with subordinate voting rights or investing in another company entirely.
Where you fall on the issue depends on whether you believe that multi-share-class companies can benefit from controlling shareholders who provide a founder’s vision focused on long-term expansion, or that such companies are prone to stagnate under a lack of external shareholder supervision and a weak board of directors.
Interest in the debate returned with two high-profile Canadian names.
Rogers Communications Inc. is controlled by the founder’s family, which collectively holds 98% of the votes but owns just 29% of the equity.
A year ago, the family fought over which executive should lead the company. After a drawn-out saga, two important facts emerged. First, a single person controls the fate of the company in the short term because they can hire and fire executives at will. Second, that same person, and the controlling family in general, is focused on growing the company over the long term.
Fast forward a year and the market no longer attaches a discernable discount to the lack of voting power for regular shareholders. (Other reasons exist to attach a discount to Rogers shares, including delays over closing its proposed merger with Shaw Communications Inc., a national network outage over the summer that angered customers, and greater future network capital requirements than its peers.)
Meanwhile, Shopify Inc. made headlines this year with changes to its voting structure. Shareholders agreed to provide the company’s founder with increased voting control over the company with the proviso that the superior-voting shares would not pass to subsequent generations, as was the case with Rogers.
The Shopify arrangement seemed like a significant request from the company at the time. The founder held 34% of the voting rights and 6% of the equity, but the company wanted to increase that voting power to 40%, where it would remain until he left the firm. This was despite an existing provision that would have converted the superior-voting shares to regular shares in the near term, as the company continued to issue equity for acquisitions and compensation.
Did Shopify shareholders have the Rogers debacle in mind when they agreed to the changes, hoping to avoid a generational transfer of superior-voting control? Or do most shareholders simply not care about voting power that much, and the change proceeded due to general apathy?
Proxy advisory firms draw significant attention to situations like those at Rogers and Shopify, as they counsel institutional investors who have a heightened interest due to their large illiquid holdings in many companies. But most individual investors have the easy option of selling their shares should they decide they no longer like a company’s governance. Indeed, the ideal of shareholder egalitarianism seems to hold little currency for everyday investors.
Unfortunately, academic studies that focus on shareholder returns in dual-class share companies provide little consensus. That’s not surprising given that so many differences can exist beyond the mere presence of multiple share classes, including degree of voting control, regulatory requirements, pace of industry innovation, board independence and superior-voting sunset clauses.
The Harvard Business Review notes that while some studies confirm lower returns for dual-class companies, others show that a dual-class structure might be optimal. Specifically, both aggressive-growth and family-controlled situations have better longer-term shareholder returns, according to some papers.
This leaves the investor to assess each situation on its own merits. A key takeaway is that while disproportionate voting control constitutes a risk, it far from guarantees the stagnancy that investors fear might lead to share price underperformance. Both Rogers and Shopify continue to innovate and expand in their respective industries, which explains in part why the market has all but buried concerns over governance in favour of focusing on future growth potential.
Mark Rosen, CFA, MBA, CFE, heads ARC Research, providing independent equity research to investment advisors across Canada.