Big investors fight back over dual-class shares
Controversial structures are the ‘scourge of corporate governance’
Institutional investors are fighting back against the prospect of dual-class shares in the UK after Downing Street held exploratory talks about altering listing rules to attract high-growth companies.
The FT reported this month that Number 10 had suggested introducing dual-class shares as part of its efforts to ensure London remains one of the pre-eminent markets to list on after Brexit. The share structures, which are often popular with start-up founders who want to retain significant control, have been used by tech companies including Google, Alibaba and Facebook.
But three big investors have pushed back against the possible introduction of dual-class shares, with one arguing the structures “have been the scourge of corporate governance for some time”.
Rupert Krefting, head of corporate finance and stewardship at M&G, said the British fund house “would be very against encouraging dual-class shares in the UK”, adding it is a “smack against everything the corporate governance code stands for”.
“If you give the founder too much power, it is not a good thing. Just look at WeWork,” he said. WeWork’s dual-class share structure at one point handed Adam Neumann, the property company’s flamboyant co-founder, 20 times the voting power of other shareholders.
Euan Stirling, head of stewardship at Standard Life Aberdeen, said the UK’s second-largest listed asset manager made clear to regulators around the world that it did not support dual-class shares. “Our approach has been absolutely consistent: in our view, it’s a bad idea. We support the principle of one share, one vote,” he added.
Last year, the Singapore and Hong Kong exchanges overhauled their rules to allow companies to list with dual-class shares. Many US companies also have two classes of shares, typically giving more voting rights to one set of investors.
The shares have proven controversial in recent years, however.
Earlier this year, Lyft, the ride-hailing company, was urged by a group of pension funds, unions and asset managers to scrap its proposed dual-class share structure ahead of its initial public offering, but it pushed ahead with the structure when it listed during the summer.
London’s main market is dominated by banks, mining and energy companies, while a host of listed technology companies have delisted over the past decade including Arm Holdings and Autonomy, after being bought by industry rivals or private equity.
Edward Park, deputy chief investment officer at Brooks Macdonald, a wealth manager, said there were examples where dual-class structures allowed a company to think longer term and not react to the vagaries of the market. But he added lack of accountability has typically been a source of more problems than success.
“Listing on the London main market has long been considered a tacit endorsement of the corporate governance of a firm so the UK authorities should think twice before changing their rules to accommodate founder-led IPOs,” Mr Park said. “Being behind the times is seldom a good strategy, however sticking to a strong set of principles normally wins out in corporate governance.”
The Downing Street discussions on dual-class shares come months after the Financial Conduct Authority was heavily criticised by fund managers and trade associations for creating a new category of listing in London that exempted companies controlled by governments from some rules that apply to oligarch-owned and private companies.