I wish I knew what voting rights were, but I’m too embarrassed to ask

When you buy shares in a company, they entitle you to a proportion of the profits via dividends. As well as that they usually – but not always – come with some other rights, including voting rights – the right to have a say in the running of the company.

If you invest in a company’s shares, you are entitled – through ownership of those shares – to certain rights. The right that shareholders tend to be most interested in, is the right to share in the future profits of the company. Owning a share will entitle you to a chunk of any dividend payouts, for example. However, there’s another important right – that is, the right to have a say in the running of the company.

Shareholders usually benefit from voting rights – that is, the right to attend Annual General Meetings, and to vote on certain corporate actions that will affect shareholders. For example, a shareholder will usually have the right to vote on big changes such as takeovers or mergers, or the right to vote in elections for board members. 

However, in recent years, some of the world’s most exciting companies have sold shares which offer fewer voting rights than other types of share in the same company. Big tech companies in particular often split their shares into different classes when going public.

For example, social media giant Facebook has “class A” shares and “class B” shares. Normal investors buy and sell class A shares, which have one vote per share. The class B shares are owned largely by Facebook founder Mark Zuckerberg, and come with ten votes per share. In 2017, social media company Snap took this a step further. The shares it sold to the public when it listed in New York, came with no voting rights whatsoever. 

Meanwhile, here in the UK, food delivery company Deliveroo plans to have two classes of share when it goes public shortly. The shares available to investors will carry one vote per share, while those owned by the founder will have 20 votes per share.

Founders argue that these different levels of voting rights insulate them from the short-termism of being a public company. In other words, they can pursue long-term strategies without the fear of being pushed out of their own companies due to a short-term run of weak performance.  

For now, shareholders seem content to put up with the inequality, in order to be able to share in the fortunes of these stocks. Whether that will last, should these companies face harder times, remains to be seen.   To find out more about shareholder democracy in general, subscribe to MoneyWeek magazine.

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