A group of investors has warned boards that opposition to dual-class shares from asset owners could increase in the future.

The alert has been given by the Investor Coalition for Equal Votes (ICEV), in a report looking at policies being adopted by stock owners around the world who believe in the “one share, one vote” principle and are frustrated with the increasing prevalence of dual-class share structures (DCSS).

After surveying the policies on dual-class shares among 31 of the world’s largest assets owners, ICEV—whose members have $1.3trn under management—concludes that current policies and anecdotal evidence “indicate that voting and other sanctions on companies with DCSS could tighten over time as investors look to express their frustration”.

The report comes just weeks after new chancellor Rachel Reeves backed changes by the Financial Conduct Authority (FCA) loosening the rules on dual-class shares for London-listed companies.

Reeves has also been behind a drive to have watchdogs support economic growth through regulatory reforms.

ICEV makes plain its opposition to dual-class shares. “Research shows that the entrenchment of management that comes about as a result of DCSS can hinder long-term financial performance of companies, with several notable academic and industry publications suggesting that long term company value is adversely impacted by a misalignment between voting rights and equity stakes.”

Dual-class shares became popular in the US for big tech stocks, where founders sought to retain control over their companies. Changes soon followed in Asia and the UK allowing DCSS as markets attempted to stem the flow of tech listings moving to the US.

Reforms last year in the UK saw stiff opposition from investor groups, including the International Corporate Governance Network (ICGN).

‘Inhibiting investor influence’

In an open letter to regulators, ICGN said: “At a time when the FCA is encouraging investors to play a greater and more responsible stewardship role in promoting the long-term success of companies through monitoring, voting and engagement, the imposition of weaker voting rights will have the opposite effect by inhibiting investor influence.”

ICEV finds four main approaches in use by asset owners to influence the use of dual-class shares. Some vote against the reappointment of a director, including board chairs and nominations committee chairs. In some cases, investors vote against directors at all the companies where they have a board role.

In other cases, investors vote in favour of shareholder proposals to “recapitalise to a ‘one share, one vote’” structure. ICEV also believe some assets owners are beginning to vote against capital resolutions, such as buybacks and share issuance, in protest at DCSS.

ICEV chair Caroline Escott and ICEV investment analyst Shane McCullagh used the Harvard Law School governance blog to encourage asset managers to wield their votes against dual-class shares.

“The very nature of the issue means that even when all independent shareholders vote against management in a particular way, company management are at liberty to downplay these shareholders’ views.

“That doesn’t mean however that investors should stop using their vote as a public expression of their view on DCSS—as they would any other issue that is material to company performance and therefore matters for their clients and beneficiaries.”