July 29, 2013

Here We Go Again: “One Share, One Vote” Proposal

As noted in this press release, Senator Elizabeth Warren has asked – via this letter – the NYSE and Nasdaq to adopt rules that would require listed companies to adopt “one share, one vote” policies. Old-timers will have flashbacks of controversial Rule 19c-4 – which was adopted in 1988 to limit the ability of companies to deviate from “one share, one vote” – and which was struck down in 1990 by the District of Columbia Court of Appeals in Business Roundtable v. SEC.

As noted in this Cooley alert:

As you may know, it’s become fairly common practice for companies conducting an IPO to set up a corporate structure with Class A/Class B common. One class, typically help by founders and management, has ten to one voting rights, which generally allows that class to control the outcome of voting on most matters submitted to stockholders. Because the prevalence of unequal voting rights has increased, if adopted, the proposal could have a significant impact on current practices.

The proposal would make companies that seek an initial listing ineligible if they have two or more classes of common stock with unequal voting rights and prohibit already listed companies from issuing additional classes of common with unequal voting rights. Warren argues that, with unequal voting rights, ordinary investors, including workers and retirees, “have limited recourse in holding management and the board accountable if the company heads in a wrong direction. In addition, unequal voting helps entrench management and a board that can enrich themselves at the expense of the general investors.” She notes that many mutual fund providers, such as Fidelity and Vanguard, oppose the introduction of new classes of stock with unequal voting rights.

Wildest Idea of the Year? Creating a “Vote Buying” Framework

I agree with the start of this Financial Times article entitled “Shareholder democracy needs people to pay for their votes” about how the proxy plumbing is broken and needs to be fixed (a project that the SEC started but that got stalled due to constant Congressional mandates in other areas). But that is as far as I got before I started scratching my head.

Two Professors from the U. of Chicago – Eric Posner and Glen Weyl – have used their economic backgrounds as a way to devise a solution to shareholders who are too lazy to vote or too ill-informed when they vote as noted in their study. So the essence of their idea is to force shareholders to buy votes so that only “interested” parties have a right to vote – owning shares would only provide a shareholder with a right to profits.

There are things in the article that I disagree with – including the end when they say the “corporate governance movement has been spinning its wheels for decades and has little to show for its efforts.” I can say with great certainty that before Sarbanes-Oxley in 2002, only a handful of people ever heard of the term “corporate governance” – including most corporate lawyers and even corporate secretaries. Reform really is only in its infancy.

Corporate elections have only just started to become more “real” in the last year or so. We may have already found at least part of the solution as more institutions spend the resources necessary to be informed. Flash forward five years and who knows what the proxy season landscape will look like – it really is changing that fast, reflected by this NY Times article about how BlackRock is becoming more active (or watch my video about BlackRock). And that’s true even if no additional reforms are enacted.

My bottom line is that I just don’t see vote buying as an idea that will catch on. I believe it could wind up with individuals or small groups (eg. corporate raiders) controlling many outcomes, some of them pretty extreme. And I’m not convinced that having some shareholders who don’t vote or read proxy statements as being that bad a thing. As it stands now, the percentage of shareholders who vote during corporate elections is far higher than what happens in the political world, albeit partly due to a position taken by the Department of Labor many years ago (ie. proxy voting is a fiduciary act).

More Thoughts About “Vote Buying” Frameworks

And Professor Lyman Johnson shares his thoughts about the Posner-Weyl proposal:

1. Beyond Professor Bainbridge’s rightful skepticism about legislative adoption, to the extent shareholders control bylaws (ultimately in the Model Act they do – and likely in the Delaware Code), which shareholders have an incentive to disempower themselves vis a via those with lesser holdings? To what degree? So such a provision in the statute alone as an option is inadequate and it would not be adopted as a default rule.

2. On a historical note, the antecedent to this proposal lies in the very old practice of granting one vote per shareholder rather than one vote per share as now is the norm. The proposal doesn’t go all the way to such equality – but it moves in that direction. The older practice was scrapped, so a compelling case must be made as to why a variation on it should now be restored.

3. If such a rule were in place, do we know how investors who favored various transactions would behave to dampen its effect? For example, rather than buying 64 shares pre-transaction to get 8 votes, perhaps buying 144 shares to get 12 votes to combat the votes of smaller holders will suffice. And so on. (Doubtless others can devise better examples). Thus, I raise the usual problem of the market workaround of a rule change that seems sufficiently unknowable ex-ante to warrant change.

– Broc Romanek