Prudent investors are interested in learning about the different types of stock -voting structures they may be exposed to throughout their investing career. Understanding the different structures will help them determine their propensity to influence change within an existing corporation.
To begin with, tenure voting – the process of receiving additional votes the longer an investor holds shares in a company – is a critical part of value investing. Tenure voting is widely viewed as the best compromise between the one-share, one-vote and the dual-class structure. Both one share, one vote and dual class have important benefits, but they also generate conflicts of interest that investors need to weigh carefully.
The “one-share, one-vote” model is often exploited by active investors in pursuit of short-term interests. The “dua-class” model is problematic because some classes of shares have more votes, while others have as few as zero.
Here we would present a more detailed discussion on:
- One share, one vote,
- Dual-class shares; and
- Tenure voting.
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One Share, One Vote
In a one-share, one-vote system, all shareholders have equal say in the direction of a corporation. The principle requires that for each share of common stock an investor holds, they receive one vote. For example, if an investor holds 50 shares in a company, they receive 50 votes. If they have a million shares, they receive a million votes.
This principle was the industry standard until the 1920s and 1930s when a new system called dual-class shares came into existence.
The biggest benefit of one share, one vote is that everyone has a proportional say in the company, depending on the number of shares they own. Although this means everyone has the same level of power, investors sometimes feel that their vote doesn’t count. This lack of voter efficacy often means investors don’t bother to vote at all.
For instance, Snap Inc. (SNAP) – the parent company of the messaging app Snapchat – currently employs a one-share, one-vote governance structure for its Class B shares. The Class B category is typically reserved for executives and early investors.
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Dual Class
Dual-class shares emerged from the one-share, one-vote system. It is based on the principle that some shareholders (i.e., the founders) are allotted more votes per share than holders of common stock. As one might expect, this principle has been highly controversial.
One of the chief benefits of this system is that the company’s founders have the ability to thwart hostile takeovers or unwanted activism from common shareholders. It’s also virtually impossible for anyone other than the founders to influence the Board of Directors.
The biggest problem with the dual-class structure is the idea that someone with a smaller percentage of the company can have much bigger voting power. This environment can lead to a toxic culture of the “haves” versus the “have-nots.”
Google parent Alphabet Inc. (GOOG) is one of the most prominent examples of a dual-class voting structure. From a governance perspective, the company’s founders have discretion of the business without the majority – a unique set-up for a company the size of Alphabet. Some analysts have described Alphabet as a public-private company hybrid.
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Tenure Voting
The tenure voting system differs from the other alternatives by giving investors more voting power when they hold shares for a specified period. For example, the rules may stipulate that investors who hold single-vote shares for two years will be given two shares.
The general idea behind tenure voting is to give more power to long-term investors of the company. In this system, shareholders who have supported the business over a longer period naturally receive more voting rights than those who have been invested for a short period. This method is not only fair and non-arbitrary, it also encourages long-term value investing in the company. This program can be implemented within a dual-class framework to give additional power to non-founding shareholders.
That being said, tenure voting isn’t without its obstacles. Chief among them is the fact that a tenured system doesn’t necessarily reward the most valuable investors – just those who have held their shares the longest. Theoretically, someone who has only a few shares can wield more voting power than someone who has invested more shares but done so recently.
Another problem with tenure voting is that not all shareholders actually care about more votes. If the investing public does not view more votes as having more power, it’s difficult to convince them that this system matters.
There is also concern that founders would ultimately wield more power over time because they are the most likely to hold their shares for a longer period. This could outweigh any gains made by regular shareholders, especially in a dual-class model.
The tenured voting structure went out of favor in the 1980s following a regulatory crackdown by the Securities and Exchange Commission (SEC). Even then, the protocol was lightly used given its unnecessary complication and difficult implementation. What’s more, treating shareholders differently is a slippery slope that typically does not lend itself well to corporate governance. For these reasons, a tenured system is unlikely to be implemented again anytime soon.
The Bottom Line
Conscientious investors know that perfect voting structures do not exist. However, they can probably choose the best option that suits their investment goals. It is clear that the financial markets have paid much more attention to short-term returns, leaving a tenure voting system on the outs. However, discerning voices on Wall Street believe this may soon change as attention shifts toward long-term value investing.
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