Open this photo in gallery: Rogers Chair of the Board Edward Rogers , left, talks with CEO Tony Staffieri at the telecommunications company's AGM, in Toronto, Wednesday, April 26, 2023. THE CANADIAN PRESS/Chris YoungCHRIS YOUNG/THE CANADIAN PRESS
Bryce Tingle is the author of Hard Lessons in Corporate Governance and the N. Murray Edwards Chair in Business Law in the faculty of law at the University of Calgary.
Behind every ridiculous business story, there are often dual-class voting shares, which provide one class typically 10 to 20 more votes a share than another.
Just in the last six months this has included Shari Redstone enlivening our summer by throwing spanners into the careful sales plans of Paramount Global’s board of directors. Ms. Redstone has a 77-per-cent voting stake through a mere 5-per-cent economic stake.
Even in Canada, dual-class shares feature prominently in the boardroom battle at Rogers – the one that memorably began with a “butt dial” and doubtless ended in very awkward family reunions. Dual-class shares allow the founding family to dominate the company despite holding a minority stake.
Canadian companies, never reluctant to scrupulously adopt every governance trend, have been abandoning super voting shares over the past two decades. During that time, the number of dual-class companies on the TSX has fallen almost in half, and only 23 companies have gone public this century with this structure.
What are we to make, then, of the fact that almost one-third of companies that now go public in the United States have dual-class shares, or that the United Kingdom has aggressively eliminated its long-standing restrictions on dual-class shares? Why is the trend in those countries different from our own? Investors in those countries must be buying shares in these new companies, and at valuations that don’t discourage companies coming to market with dual-class structures.
If you look past the anecdotes (and the weird rhetoric about democratic principles), the evidence about dual-class shares is quite surprising. Empirical studies reveal dual-class share structures are associated with better corporate performance than single-class share structures. In this respect, super voting shares are like almost every other governance practice advocated by the governance industry: none of them are supported by the empirical evidence.
Researchers find that companies with dual-class shares regularly make investments that the market doesn’t like. But that is the point of dual-class shares. These structures provide managers with the freedom to make contrarian bets. The best example of this sort of thing is Facebook’s US$1-billion purchase of Instagram, famously criticized at the time, but now seen as visionary. Some studies point to strong evidence that dual-class share structures are particularly associated with the kind of innovation and R&D successes that Canadian companies currently struggle to achieve.
Researchers also find that companies with super voting shares pay their executives more than matched firms. However, it turns out that this pay increase comes not in the form of cash payouts (which permit the managers to receive more money than their shareholdings would justify) but because of the heavier use of equity incentives with contingent payouts. This results in higher pay for executives because dual-class companies pay more cash out to shareholders than their peers.
Concerning the most critical issue of long-term economic performance, corporate law and governance professor Bobby Reddy of the University of Cambridge summarizes this research into three categories. The first category finds that dual-class companies trade at a discount to their peers. The second group of studies matches dual-class companies with nondual-class firms and finds the dual-class portfolio generates higher returns. This suggests the market is simply wrong in the discount it applies to dual-class companies. The third group of studies looks at measures of actual operating performance: several find dual-class companies display superior performance, and none find underperformance.
In Canada, CIBC published a report last year that found dual-class companies outperformed the benchmark TSX and S&P Indexes by an average of 3.7 per cent. After weighting for market cap, the compound annual growth rate of dual-class share companies was 8.7 per cent, compared with 7.6 per cent for the index companies. In a recent American study, super voting shares outperformed the Russell 3000 Index by a whopping 39 per cent over a 20-year period.
Empirical studies on other aspects of managerial behaviour, such as the quality of financial disclosure and instances of corporate misconduct, find dual-class companies are markedly superior to their peers. According to Canadian governance researcher Matt Fullbrook, Canadian companies with dual-class shares have longer lifespans than their counterparts and show other evidence of greater stability and longer-term decision-making.
British regulators and American investors seem to be able to follow the evidence on the issue of dual-class shares. Surely Canada is capable of doing the same? Dual-class shares provide strategic advantages for companies, particularly those pursuing innovation or looking to make the kind of bold, visionary decisions that drive long-term success.