Absent the threat of external discipline from institutional investors and other stakeholders, a CEO’s omnipotence can result in incautious decisions, like voting down a takeover offer that would provide a significant premium for shareholders, Quinlan adds. “Personally, I believe it is unconscionable for a company to sell shares to the public but keep voting control through dual-class shares.”
He is far from alone in that view. “By not listening to outside investor viewpoints, you run a big risk of destroying long-term value,” says Rahki Kumar, managing director and head of ESG (environmental, social and governance) investments and asset stewardship at State Street Global Advisors.
Peter Kimball, head of advisory services at governance consultancy ISS Corporate Solutions, agrees: “By definition, you’re creating an insular environment with less accountability to shareholders, which can increase risk.”
Kimball raises the example of SnapChat parent Snap’s recent IPO, which took dual-class shares to a new extreme—offering no voting rights at all to shareholders. “It’s resulted in the rare move by the Council of Institutional Investors to request that S&P Dow Jones Indices and other index builders exclude the company from their indexes,” he explains. “Otherwise big stock portfolio managers would be obliged to buy Snap’s shares, without having any say in its direction.”
“Personally, I believe it is unconscionable for a company to sell shares to the public but keep voting control through dual-class shares.”
Kumar also questions the Snap voting structure. “Companies with dual-class shares argue that it allows for more long-term focus,” he says. “But what if the focus is wrong?”
Such leadership arrogance can backfire, as it suggests a company that has no interest in the concerns of others. “Shareholders have ownership of something, but no ability to protect their interests,” says Baum, a former investment banker. “Meanwhile, those with voting powers are not held accountable to anyone but themselves. That’s not exactly a comforting message.”
Perhaps worst of all, such structures do not necessarily enhance shareholder returns. “All else being equal, shares that have dual voting rights generally are less valuable,” says Chris Ruggeri, national managing partner of strategic risk and brand management at Deloitte. “Ordinary shares often trade at a discount to their theoretical value, the spread tending to narrow in bull markets.”
2. Rigging CEO Compensation
Public outcry over CEO compensation has been around for a while, resulting in the widespread use of peer groups by board compensation committees to justify high pay packages. But what if the peer groups were judiciously selected to artificially inflate the pay of senior executive leaders?
Jun Yang, an associate professor of finance at Indiana University’s Kelley School of Business, and Michael Faulkender, an associate professor of finance from the University of Maryland’s R.H. Smith School of Business, collaborated on a report in 2010 demonstrating that many board compensation committees had benchmarked their CEO pay to that of higher-paying peers. “Needless to say, we were surprised,” Yang says.
The eye-opening study was a factor in changing the rules to require boards to disclose the names of the CEOs they had benchmarked against. Nevertheless, Yang, who continues to study the subject, says the problem has not gone away. “It’s just not as severe as it was in the past,” she explains.