Dual share structures could erode accountability at the top
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It is ironic that in the aftermath of the launch of the new UK Stewardship Code that the UK government is taking soundings on relaxing limitations on dual class share structures (“Why dual class shares deserve consideration”, editorial, November 12). The Stewardship Code seeks to encourage and empower shareholders to use their voting rights intelligently and responsibly to hold companies to account on key matters including board composition, remuneration and capital resolutions.
The introduction of dual class share structures in the UK would be anathema to this: it would have the effect of watering down the voting voice of shareholders to the point that minority shareholders do not matter. This is not only a form of regulatory schizophrenia vis-à-vis stewardship, but we need to emphasise that dual class structures are not welcomed by investors. Of the International Corporate Governance Network’s investor members (whose aggregate assets under management exceed $34tn), more than 80 per cent responded negatively in a recent member survey against dual class shares.
And why? Because, as you note, dual class shares erode accountability to management and have the effect of entrenching managers and controlling owners. While in the short term this might protect a young company from the animal spirits of financial markets, the trade-off is not positive longer term for minority investors, or indeed for the company itself.
Research has demonstrated that it is the animal spirits of entrenched management or controlling shareholders that we really need to worry about; over time it has been shown their own private benefits of control can come at a cost to smaller shareholders. We encourage the London market not to join the global race to the bottom to compete for listings with other stock exchanges.
Who does want this? Well, for starters, the London investment banking community, and, of course, the coffers of the London Stock Exchange — itself a listed company with its own profit motives. You made no reference to the clear conflicts of interest these create. The integrity of the London market is its major global calling card. This should not be compromised, and holding firm against dual class shares will not marginalise the London market relative to its competitors. Yes, the Americans allow dual class shares. But as you have observed on a range of matters, particularly in recent years, not everything coming out of the US is necessarily worth emulating.
George S Dallas
Policy Director, International Corporate Governance Network,
London EC1, UK
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