Download Key Considerations in the Debate on Differentiated

Key Considerations in the Debate
on Differentiated Voting Rights
Shareholder control-enhancing mechanisms such as
differentiated voting rights (DVR) are not new to
Europe but are regaining momentum as regulators
look for solutions against the perceived short termism
of
corporate
governance
actors,
including
shareholders. In this paper, BlackRock revisits certain
assumptions justifying the need for DVR, outlines its
view of the unintended consequences should DVR be
introduced and proposes alternative solutions to
reinforce long termism. As European policymakers are
considering introducing the granting of DVR in order to
promote long-term investing, we believe it is necessary
to express our support to the proportionality principle,
also known as the ‘one share, one vote’ principle.
Background
In France, the Florange Act adopted in 2014
introduced the automatic granting of double voting
rights to shareholders registered on the shareholders’
registrar for at least 24 months. In Italy issuers have
been offered the opportunity to amend their bylaws to
grant double voting rights to their “loyal shareholders”.
The proportionality principle
The proportionality principle is based on two premises:
1. Shareholders as the residual claimants have
the strongest interest in maximising firm value;
and,
2. Voting power should match economic
exposure.
It is at the core of corporate governance that to reduce
the agency problem, all shareholders need to
effectively monitor companies. As regulators call on
investors to further engage with issuers in a deeper
and more responsible way, we believe they equally
should protect shareholders’ rights, particularly those
of minority shareholders, by promoting the
proportionality principle. Indeed, the granting of DVR
can result in an over-concentration of power in the
hands
of
(a)
majority shareholder(s),
thus
disenfranchising other shareholders and amplifying the
risks of extraction of private benefits by the majority
shareholder(s).
Revising assumptions
#1: “Differentiated voting rights promote long-term
investing.”
1
1
Anecdotal evidence and research suggest that
changing companies’ share structure by introducing
enhanced voting rights or dividends based on the
duration of ownership will not lead to a material
change to the time-horizon of investment in
companies. Rather, these measures could well be
counterproductive by entrenching a core group of
shareholders to the detriment of minority shareholders.
Entrenched companies tend to engage less frequently
and with fewer shareholders and to be less attractive
2
on the market from an investment perspective thus
raising their cost of capital. In our experience, the
foundation for a long-term relationship between
companies and investors is transparency and
meaningful engagement with shareholders.
#2:
“All
shareholders
can
differentiated voting rights.”
benefit
from
DVR are usually attached to shares which are owned
by the shareholders who have been on a shareholders’
registrar for a certain period of time (e.g. 24 months).
The operational and administrative complexities of the
registration process can prevent cross-border investors
from receiving the enhanced voting rights to which
they are entitled. For example in France, voting would
become a manual process as the shareholders’
registrars are not integrated in the voting chain or
connected to international voting platforms, thus
creating significant costs and risks as new additional
ad hoc processes need to be implemented. In most
cases, only domestic shareholders can effectively be
granted DVR, which may result in a lack of equal
treatment and opportunities between domestic and
cross-border shareholders. This may decrease the
willingness of investors to provide funds to the
companies which in itself is contrary to the objective of
incentivising shareholders to hold their shares for a
longer period.
#3: “Differentiated voting rights positively impact
the company’s value.”
Deviations from the proportionality principle can affect
the value of shares negatively. Indeed, institutional
investors (i.e. asset owners and asset managers) tend
to divest from companies and from markets with
Corporate Governance and Responsible Investment – Key Considerations in the Debate on Differentiated Voting Rights
weaker shareholder rights. A discount is usually
applied to companies which do not offer proportionate
voting rights, due to the dilution of certain
shareholders’ voting power and the risk of an
excessive extraction of private benefits by controlling
shareholders. A survey of investors showed that a
discount of up to 30% is applied to companies
displaying
shareholder
control-enhancing
3
mechanisms. Moreover, a firm’s cost of capital could
be higher when deviations are possible, which may
lead to inefficient levels of investment and capital
misallocation.
#4: “Institutional investors are short-term and
should not benefit from differentiated voting rights
anyway.”
Passive investment is by definition long-term, as index
investors will hold shares of the company for as long
as it is part of the index. Passive strategies across the
UK-managed asset base have continued to gain
momentum, from 17% in 2006 to 22% in 2013
4
according to the Investment Association (IA).
Regarding active investment, a 2012 survey by the IA
shows that the average holding period of UK stocks by
5
its members was at least four years.
#6: “Differentiated voting rights can
companies against hostile takeovers.”
defend
On the contrary, the existence of DVR may actually
increase the risk of a creeping takeover and, in case of
a multi-class share structure, incentivise the controlling
shareholder to sell its stake with a premium to a
potential acquirer. These operations do not allow other
shareholders to opine on the change of control or to
offer their shares and thus creates significant
investment risks.
#7: “Differentiated voting rights are already the
norm.”
Empirical studies demonstrate that whereas enhanced
shareholder control mechanisms are widely available
in most countries, the number of companies that
12
actually use these mechanisms is more limited ,
13
especially in the most recently listed companies. As
issuers are progressively improving their corporate
governance practices and adopting the proportionality
14
principle , regulators would be sending the wrong
message by promoting DVR.
Proposed solutions
A widespread misbelief exists that active asset
managers are incentivised to turn portfolios, and
therefore manage them with a short-term focus to the
detriment of their clients. This ignores the fact that the
investment performance the client receives is directly
aligned with the revenues a fund manager receives.
Fund managers are paid as a portion of the fund’s
assets under management (AUM). Transactions that
would decrease the AUM would be both to the
detriment of the clients and of the fund manager.
References to industry-level portfolio turnover levels
and standard length of ownership levels in the past
have also aggregated proprietary trading by banks with
institutional investor holdings and so provide a
misleading view of actual holding period by institutional
6
investors.
Cross-border institutional investors are, for the most
part, long-term and should not be considered shortterm on the basis of a flawed premise.
Our proposed solutions to reinforce long termism of
corporate governance actors without creating an
uneven playing field between domestic and crossborder shareholders are as follows:
•
Transparency is an effective mechanism
regulators can put in place with a long-term
effect as it raises the bar across the
governance chain. The currently discussed
Shareholder Rights Directive (SRD) proposal
promotes increased shareholder transparency,
e.g., by asking shareholders to disclose their
engagement policy and their voting.
•
Better cross-border execution of voting rights –
which the SRD proposal seeks to achieve.
Additional readings
•
Letter sent by Larry Fink, BlackRock’s
Chairman and CEO, encouraging a focus on
long-term growth strategies, March 2014:
http://www.blackrock.com/corporate/enco/literature/publication/letter-to-corporatesfink-032114.pdf
•
BlackRock’s response to call for evidence on
the Kay Review of UK Equity Markets and
Long-Term Decision Making, Nov. 2011:
http://www.blackrock.com/corporate/engb/literature/whitepaper/kay-review-uk-equitymarkets-long-term-decision-making-bis111811.pdf
#5: “Differentiated voting rights are supported by
most non-Anglo-Saxon markets participants.”
The proportionality principle is a widely-supported
principle recognised as a core concept of corporate
governance and shareholder democracy by the vast
7
majority of institutional investors across Europe.
What’s more, in France the Florange Act introducing
an automatic granting of double voting rights to all
listed companies received negative comments by the
8
9
market regulator (AMF ), French investors (AFG ),
10
11
issuers (ANSA ), as well as French academics .
2
Corporate Governance and Responsible Investment – Key Considerations in the Debate on Differentiated Voting Rights
8
Endnotes
1
Mercer, Stikeman Eliott, and The Generation Foundation,
“Building a long-term shareholder base: assessing the
potential of loyalty-driven securities”, 2013.
2
IRRC Institute and ISS, “Controlled Companies in the
Standard and Poor’s 1500: A Ten Year Performance and
Risk Review”, Oct. 2012.
3
European Commission External Study by ISS, Sherman &
Sterling and ECGI, “Report on the Proportionality Principle in
the European Union”, 2006. Available here:
http://ec.europa.eu/internal_market/company/docs/sharehold
ers/study/final_report_en.pdf
4
Investment Association, the “Asset Management in the UK
2013-2014”:
http://www.theinvestmentassociation.org/assets/files/researc
h/2014/20140909-IMA2013-2014-AMS.pdf
5
“Asset Management in the UK 2011-2012 – The IMA
Annual Survey”, IMA, September 2012.
6
See: The Investment Association, “Understanding Equity
Turnover Data: Initial findings from IMA research submitted
to the Kay Review”:
http://www.investmentfunds.org.uk/assets/files/consultations/
2011/20111128_IMATurnoverResearch-InitialFindings.pdf
7
European Commission External Study by ISS, Sherman &
Sterling and ECGI, “Report on the Proportionality Principle in
the European Union”, 2006.
Letter of AMF’s Chairman to the Minister of Economy and
Finance, 11/09/2013. Available here:
http://clotildevalter.fr/wp-content/uploads/2013/09/Lettre-deG%C3%A9rard-Rameix-au-Ministre-de-l%C3%A9conomiePierre-Moscovici-11-septembre-2013_PPL-OPA.pdf
9
The French Asset Management Association is encouraging
companies to re-introduce the ‘one share, one vote’ principle
in their bylaws:
http://www.afg.asso.fr/index.php?option=com_docman&task
=doc_download&gid=4439&Itemid=82&lang=en
10
Association Nationale des Sociétés Anonymes, Avis n°14007, March 17, 2014.
11
See, for example, A. Couret, “Le retour du débat sur le
droit de vote double”, Droit des sociétés, nov. 2013 - n° 11;
or H. Le Nabasque, “L'inversion du droit de vote double dans
les sociétés cotées, Revue de droit bancaire et financier,
nov. 2013.
12
OECD, “Lack of Proportionality between Ownership and
Control: Overview and Issues for Discussion”, Dec. 2007.
Available at:
http://www.oecd.org/daf/ca/corporategovernanceprinciples/4
0038351.pdf
13
European Commission External Study by ISS, Sherman &
Sterling and ECGI, “Report on the Proportionality Principle in
the European Union”, 2006.
14
In France, for example, the proportion of companies with
double voting rights was slowly reducing. See “Panorama
des pratiques de gouvernance des sociétés cotées
françaises”, Ernst & Young, 2013.
The opinions expressed are as of April 2015, do not constitute investment or regulatory advice and are subject to change. Issued by BlackRock Investment
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Corporate Governance and Responsible Investment – Key Considerations in the Debate on Differentiated Voting Rights