Regulating Multi-tiered Stockholder Structures

It is now 6 years since the Sarbanes-Oxley Act was brought in to make the financial details of listed companies transparent, whereby company directors would be held liable for any breaches of this new law.

However, corporate governance may still be an issue when multi-tiered voting rights are allowed. It is possible for poor management that has preferential voting rights to cling on to control of a company when the vast majority of shareholders do not want this outcome. One example is a listed company whereby the founding family has around 1% of the stock, but 32% of the voting rights!

It is certainly possible for a company board to act in the interest of itself, rather than its ordinary shareholders, and the obvious question arises as to whether this is fair and reasonable behavior for a listed company.

Other ways that a board can act in its own self interest are regarding executive pay. It is very difficult for minority shareholders to establish whether a "remuneration board or committee" are truly independent, or simply people put forward by the board to give the appearance of independence. The issuing of share options for executives is also contentious, as they often bear little resemblance to a company’s relative performance.

When a company chooses to become a listed company, it does so to enhance liquidity, or its ability to raise fresh capital, or for the current shareholders to realize monetary gain, or simply for reasons of prestige. But should these entities be allowed to list with such an unfair structure? If the management is poor, it should be the ordinary shareholders' right to remove/replace them.

Nothing can destroy shareholder value faster than poor strategic decision making. As the role of a company director is to steer the corporate strategy and maintain corporate governance, I believe that boards clinging on to power (probably after poor strategy) is abhorrent.

I would suggest the following as remedial action:

1) All listed companies must convert all preferential shares to ordinary shares (within 3 years).

2) A list of potential non-executive board members should be presented to the shareholders, with the possible outcome of none being approved. If this situation arises, the shareholders could vote for anybody at the AGM to become a non-executive director.

3) Laws should be enacted to prevent 'poison pill' defenses whereby a board can prevent takeovers. This should also prevent local states from preventing a takeover (it should be at federal level, where local political influence is likely to succeed).

I am looking forward to your views as I feel that these issues should be discussed.

Disclosure: None