Super-voting and dual-class share structures have increasingly been in the news over the past six months, as frenetic deal activity is focusing buyers on several undervalued franchises that contain these ownership features. Three high-profile companies that come to mind are Dow Jones (DJ), Cablevision (NYSE:CVC) and New York Times (NYSE:NYT), each of which either is or has been a topic of recent deal talk. I've done some writing on the one share/one vote issue in different contexts, with the following key excerpts by post:
04/06/2007: Shareholder Activism: Checks and Balances at Work (re: New York Times)
It will be interesting to see if Mr. Elmasry, ISS and the other Class A shareholders can place enough pressure on Mr. Sulzberger and the other Class B shareholders to live up to their fiduciary duty without hiding behind the historic dual class media protection arguments. Because once the arguments become centered upon economics, maximization of shareholder value and business strategy, both management and the Board will find themselves in a far more tenuous position, indeed.
04/05/2007: Shareholder Activism and the Free Markets (re: Motorola (MOT))
One share, one vote. Elimination of poison pills and staggered boards. The ability to wage proxy contests. In short, essential elements of the checks-and-balances among shareholders, corporate managements and Boards of Directors. This is why people like Carl Icahn and other activist investors serve a critical function in the capital allocation process. If a bunch of corporate cronies are intent on unfairly padding their wallets at the expense of shareholders, placing downward pressure on the stock price, buy up a stake and agitate for change. If a management team is off pursuing large ticket, low probability R&D projects, the strategy of which is perceived negatively in the marketplace, gain a toehold and clamor for a share buyback. This is a story we've seen acted out again and again.
01/24/2007: Proxy Voting and Economic Ownership: Getting the Big Things Right (re: vote w/o value)
Anyone who has been hanging around M&A, derivatives or prime brokerage knows of the ability to split off voting power from economic value, which can be used to great effect during hotly contested corporate fisticuffs. And I've got to say it does seem somewhat unethical (if not illegal) to wield voting power in the absence of economic interest or, more precisely, to use disproportionate voting power to impact a substantially smaller economic interest. It doesn't cost that much to buy votes, and if it can be used to sharply increase the odds of maximizing value on a position without risking a like amount of capital that is pretty cool. But is it fair, and does it go against the very principles or one share/one vote, when the shares and votes cease to be inextricably linked? I am neither an ethicist nor a moralist, but I can certainly appreciate the objections to this type of financial engineering.
Thorold Barker of the Financial Times recently penned a very lucid and insightful column concerning the value of a vote on Wall Street. It is one of the better pieces I've read in this vein, which is not surprising since Thorold is a very smart guy who has inspired me to critique his thoughts previously. Some of the salient points from his recent column are as follows:
Concerning the News Corp. (NASDAQ:NWS)/Dow Jones bid
Success will depend on winning the support of the Bancroft family, which controls the company through super-voting shares but has limited influence in the day-to-day running of the business. If Mr Murdoch cannot charm or bully them into selling, ordinary shareholders will probably see their stakes plummet in value.
Concerning the Dolan Family/Cablevision bid
Then, on Wednesday, the Dolan family finally got a board recommendation to take Cablevision private after two failed attempts. The trouble is, the price is still too low. Time Warner Cable would almost certainly snap it up for more than the Dolans are willing to pay. But the family, again with voting control through a dual structure, has denied other shareholders full value by refusing to sell the company to anybody else.
On the possible benefit of a dual-class share structure
It is not all doom and gloom. Such shareholder structures can sometimes work in favour of the disenfranchised. For example, Mr Murdoch would not have offered anything like $5bn as an opening bid for Dow Jones if he had not needed to dislodge the Bancrofts. If a deal does get done, the entrenched family position will have made all shareholders a lot richer.
On how voting should work
The basic rule should be one share one vote. Too often investors have held their noses and accepted dual structures as the only way to get exposure to specific companies. The thinking, presumably, is that by the time the structure comes back to bite them, they will be long gone. But bite somebody it almost certainly will.
A proposed prescriptive
Perhaps the solution is for those who believe their companies need the protection of a dual structure (such as newspaper owners wanting to protect editorial integrity) to keep them in private ownership. That would hardly be a big handicap in today’s capital-flooded world.
I think Mr. Barker's analysis is both correct and pragmatic. It is, however, unfortunate. One share/one vote should be the way of it, but by virtue of investors understanding and pricing in the possible ramifications of this form of ownership, not by regulatory fiat. Is the market efficiently pricing the impact of the dual-class structure on shareholder value? Presumably institutions are, but retail investors most likely are not. And this is too bad. And I think Mr. Barker is right when he looks at the issue vis a vis a rapid-growth company like Google (NASDAQ:GOOG), where the implicit discount of dual-class ownership should be small. But what about the three companies mentioned above? None of them fall into the Google category; they are all having their growth woes either due to inadequate scale, rapid technological change or limited growth budgets. And this is when the dual-class discount is actually the greatest, where the alignment of motives between those holding the super-voting shares and those holding the ordinary shares begins to break down.
But more importantly, should any of this matter? IMHO - No. The Boards of public companies have a fiduciary duty to all shareholders, not just those who are, well, "more equal" than the others. It shouldn't matter that the Dolan family has voting control of Cablevision, just as it shouldn't matter that the Bancrofts and Sulzbergers have voting control of Dow Jones and New York Times, respectively.
Consider the Wikipedia definition of the concept fiduciary duty:
A fiduciary duty is the highest standard of care imposed at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the "principal"): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents. The fiduciary relationship is highlighted by good faith, loyalty and trust, and the word itself originally comes from the Latin fides, meaning faith, and fiducia.
When a fiduciary duty is imposed, equity requires a stricter standard of behaviour than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where their fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from their fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd."
This rule should predominate over all other factors, such as voting control. The fiduciary standard is specifically geared to ensure that personal interests are not placed above those of the principals, which routinely seems to happen in these situations, albeit after a bit of a scuffle. Sure, the Dolan's weren't able to steal Cablevision over the past few years as they have tried to do, but they are sure getting close to buying that franchise at a significant discount to its true private market value. And what of Dow Jones? While the jury is still out the Board will hopefully comport itself in a manner consistent with the principles of fiduciary duty, and not some lesser standard.