Shareholders: reclaim your voting rights

Dual-class voting structures are unacceptable – but it’s up to shareholders to hold firms to account, says John Stepek.


Snap founders Evan Spiegel and Bobby Murphy:genius founders needoversight too
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Dual-class voting structures are unacceptable but it's up to shareholders to hold firms to account.

When Snap, the owner of photo-sharing app Snapchat, went public last year, the company was widely pilloried for issuing shares with no voting rights. In other words, regardless of how many shares an investor bought, they would have absolutely no say in how the company was run. This, it should go without saying, is a disgrace. Owners are supposed to hold managements to account. If shareholders are nothing more than cheerleading bystanders competing to provide funds to all-knowing genius founders, then what is the point of shareholder capitalism? Founders argue that they don't want to be distracted from their long-term vision by the concerns of short-term, profit-obsessed investors. To an extent, that critique is justified, but the answer is to remain private, or improve your communication strategy, not just strip shareholders of rights.

The good news is that, in reaction to Snap, the big index providers in the US S&P and FTSE Russell changed their rules to exclude from their indices companies that fail to give shareholders at least 5% of voting power, and they may be set to push that proportion higher. As a result, Snap is excluded from the major US indices, and thus from the index funds that track them, which can't have helped its lacklustre market performance.

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The bad news is that this treatment doesn't seem to have deterred the founders of Dropbox, the latest hot initial public offering (IPO). Alongside plain old A shares, Dropbox, a software service that stores all your digital clutter online, plans to issue B shares (ten votes for every class A vote) and C shares (no votes at all). Music-streaming service Spotify, similarly, plans to give its founders extra voting rights. As John Plender in the Financial Times notes, tech stocks are particular sinners on this front, with Google kickstarting the trend for dual-class structures in 2004. Since then, "investors have been trading in their governance rights in the hope of backing another Google and the belief that the founding entrepreneurs are miracle workers".

One problem, notes Plender, is that exchanges are competing for business, leading to a race to the bottom on corporate governance standards. To see this in action, you need only look at the compromises London is considering making in order to attract the listing of a tiny proportion of shares in Saudi Arabia's state-owned oil giant Aramco. And given that institutional shareholders have rather neglected their duties as long-term custodians of capital, it's perhaps no surprise that companies feel they can get away with stripping us of our rights. The only answer is for individual shareholders to make it clear that this is unacceptable you should shun these listings and the managers who back them.

I wish I knew what a preference share was, but I'm too embarrassed to ask

Ordinary shares give an investor part-ownership of a company, the right to vote on various decisions (usually though see above for disturbing exceptions), and a share of the dividends. However, firms may also issue other types of shares, including preference shares (sometimes shortened to "prefs"). In the UK and US, these are usually non-voting shares that pay a fixed dividend out of post-tax profits.

They have priority when it comes to payments: if a firm does not pay a dividend on its preference shares, it cannot pay an ordinary dividend. The dividend will often be cumulative, which means that if payments are missed, any arrears must be made up before ordinary dividends are paid. If the firm is wound up, preference shareholders get paid before ordinary ones (although the reality is there probably won't be anything left for either once creditors have been repaid).

Less common types of share include participating preference shares, which may get a share of any growth in company profits; convertible preference shares, which can be converted into ordinary shares under certain conditions; and redeemable preference shares, which the company can choose to buy back on certain terms.

Since most preference shares pay a fixed dividend, they behave very similarly to bonds when interest rates and inflation are falling, the price of the preference share will tend to rise, reflecting the increasing value of the fixed payout. However, preference shares are more risky than bonds (as they are further down the pecking order in the event of bankruptcy) and so tend to offer higher yields to reflect this. The controversy over insurer Aviva's announcement that it is considering redeeming its high-yielding preference shares at their face value (rather than the higher price they trade at) has introduced another risk

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.