Dual-class shares are undoubtedly a contested issue, never failing to cause a stir, whether it be from institutional shareholders considering them a risk, or from founder CEOs who claim them as a must-have to fulfil their vision.
But one academic takes a different angle. In a new paper law professor Alessio Pacces argues that dual-class shares could help support the pursuit of low carbon innovation, and even more so if supported by institutional shareholders.
Pacces claims that holders of extra voting rights and, therefore, more influence, are able to make higher-risk decisions to pursue low-carbon tech. If institutional shareholders support these moves by investing in companies with dual-class shares, they can potentially help drive change to reduce greenhouse gases.
“I argue that controlling shareholders and institutional investors must cooperate to make corporate governance sustainable. The former should contribute their vision; the latter should contribute finance to scale the vision and screen its quality.”
Porsche’s electric dream
Pacces says both Warren Buffett of Berkshire Hathaway and the Porsche-Piëch family provide evidence that dual-class shares, and the support of institutional investors, can produce climate-friendly results. Buffett invested in Occidental Petroleum, which is committed to building 100 direct air capture plants. Meanwhile, Porsche has committed itself to ensuring 80% of its production will be electric vehicles by 2030.
However, Pacces believes the current status quo is not enough, saying institutional investors would be more likely to select dual-class companies if they had contractual backing.
The legal vehicle Pacces identifies is a “contingent transfer” sunset clause. Essentially, it means that, if controlling shareholders meet carbon reduction targets, “dual-class shares” become permanent. If they miss the targets, the voting structure reverts to one-share-one-vote. The important thing is that it should have no time limit.
This would work better than the usual time-based sunset clauses, because deadlines are always arbitrary and create “cliff edges”, which could actually incentivise controlling shareholders into “value destroying actions as the deadline approaches”.
Pacces adds yet another potential lever for investors to pressure companies into addressing climate-related change. His argument may be compelling, but it could take more to persuade many observers to budge on their low opinion of differential voting rights.
Opponents have worried in the past that dual-class shares reduce accountability of management, create unequal voting rights, can be abused by controlling shareholders, and can undermine company valuations.
The longer view
However, in recent years there has been a major push to establish dual-class share in some markets (even London). Founders of tech companies find dual-class shares particularly attractive, arguing that they support their ability to pursue strategies that may be unpopular with shareholders seeking short-term gains.
Proponents argue, echoing Pacces, that dual-class shares can help align the interests of founders with long-term investors.
The London Stock Exchange changed its listing rules in December 2021 to permit dual-class shares for premium-listed companies. Companies with dual-class shares include Deliveroo, the food delivery firm, footwear brand Dr. Martens, and The Hut Group, a health and beauty company.
Whether any of these companies has improved its climate credentials as a result of dual listing is impossible to tell. That may require further research—and the right relationship with investors.