Are dual-class shares on the agenda for UK stock markets? Some media outlets certainly seem to think so.
Indeed, the Financial Times last week reiterated its belief that UK government has been discussing the possibility of allowing a dual-class capital structure. The paper’s leader writers have even written an editorial backing its exploration.
This week shareholders struck back. In an article for the FT George Dallas, policy director for the International Corporate Governance Network (ICGN), spelled out why it would be a bad idea.
Dallas argued that dual-class shares—share structures that allow some shares more voting rights than others—would “water down” the voice of shareholders at a time when a recently revamped Stewardship Code seeks to empower them.
Management accountability is “eroded” he said, causing them to become “entrenched and controlling owners”. Over time, he added, the benefits of control resulting from dual-class share structures, comes at a cost to small shareholders.
“The integrity of the London market is its major global calling card,” Dallas wrote. “This should not be compromised, and holding firm against dual-class shares will not marginalise the London market relative to it competitors.
“Yes, the Americans allow dual-class shares. But as you [the FT editorial] have observed on a range of matters, particularly in recent years, not everything coming out of the US is necessarily worth emulating.”
A global issue
Of course, the UK is in the midst of a general election and it is difficult to gauge whether any of the main parties have a particular passion for dual class. It’s not a topic that politicians generally campaign on, though its worth bearing in mind that left-leaning parties tend to prefer less power for corporate leaders, not more.
But why should a clamour for its introduction in the UK be emerging? One answer is that other stock markets do it. As Board Agenda has previously pointed out, dual-class listings have become something of a global issue. Debate has raged in the US where they are permitted because of the control they give to founders at tech giants like Facebook and Google. Meanwhile, Hong Kong recently permitted dual-class listing for the first time.
And why did it do that? Because, as already alluded to, big tech firms like dual-class listings and Chinese companies were veering toward the US for their flotations. And founders like them because they confer lots of power. Indeed, back in 2003, academics labelled such companies “dictatorship firms”.
The drive behind a discussion for dual-class shares in the UK is likely London Stock Exchange’s desire to win its share of the big tech listing action.
There’s also another reason why big tech is attractive for London. The number of companies listed in the UK has been on a downward trend since 2015. Currently at around 2,109, it’s better than it was in 2017 and early 2018, but significantly lower than the 2,429 of January 2015.
The fall in the number of US listed companies has also been a matter for public comment. If the future is tech then stock markets want their listings. And if their founders want dual-class shares, then the leaders of markets that don’t have them will likely lobby for reform.
Checks and balances
Pressure in the UK seems to be growing, albeit slowly and out of the public eye; an editorial here a leaked government conversation there.
But it’s not just about competitiveness among exchanges. Some academics have argued that businesses with dual-class listings can increase company value because it enables corporate leaders to take a long-term view.
However, Stefan Petry of the University of Manchester, has pointed out it can go wrong under some circumstances.
Firstly, “when growth and innovation slow down”. There are those that claim the big tech companies have become much like any other business in a mature market, so why would should they have special shares?
Secondly, succession is hard with dual-class shares. A single class of share ensures “control is not passed on via dictatorship”.
Lastly, “dramatic change” is difficult if a company hits a scandal. All-powerful leaders via superior voting rights might prove resistant to reform.
Some argue “sunset clauses”—companies reverting to one-share-one-vote after a limited time—is the answer. ISS, a proxy adviser, already recommends seven years. Elsewhere, BlackRock, the world’s biggest asset manager, has proposed regular shareholder votes on capital structure with the board forced to explain why a dual-class system should be retained.
Shareholders should also get the right to vote on converting the structure back to one share one vote, they say.
Stock exchanges increasingly desire dual-class listings, and so does big tech. There are those that argue the subject shouldn’t just be an issue of listing rules, but a matter for government policy. If the UK becomes serious about them, checks and balances are likely to be an important part of the discussion.