Marc Smith is acting editor of Families in Business.
The myriad voting shares of large companies have been under scrutiny for being unfair and negatively affecting company valuations. However, as Marc Smith reports, the EC has found that they are not to blame …
A potentially troublesome edict for large, listed family businesses looks to have been avoided following the publication of a European Commission report on proportionality between capital and control – known as the "one share, one vote" (OSOV) issue. There had been speculation that the Commission was looking to end the situation whereby shares issued to investors had inferior voting rights, and look to champion a OSOV system. However, the report found that "there is no conclusive evidence of a causal link between deviations from the proportionality principle and either economic performance or governance".
While the practice of offering different voting rights is perfectly legal, a range of groups – from activist investors to corporate governance purists – have been critical of some recent transactions, such as the Porsche-Piech families gaining control over VW despite only owning half its equity, and its subsequent control of Scandia through super-voting shares. The status quo was believed to be unfair, made management less efficient and negatively affected company valuations.
However, internal market and services commissioner Charlie McCreevy commented: "Previously, we didn't have a clear picture of how this issue affects European listed companies and whether it has an impact on their economic performance. Now that these facts are on the table we will examine, with an open mind, the question of whether there is a need for Commission action in this field."
The report looked into the range of control enhancing mechanisms (CEMs) that companies use to offer different voting rights: multiple-voting rights; voting-rights ceilings; ownership ceilings; non-voting shares; and instruments such as non-voting preferential shares and company pyramids. While the report did not find CEMs guilty of causing poor company performance, it did indicate that "investors perceive these mechanisms negatively and consider more transparency would be helpful in making investment decisions".
The report examined the situation of 464 listed European companies in 16 Member States and found that 44% use at least one CEM – the country with the highest proportion of such companies was France. The overall occurrence of CEMs in large companies is 52%, with pyramid structures being the most common (27%), followed by multiple voting rights shares (21%), and shareholder agreements (14%). The report also found that some of these companies deliberately combine CEMs to increase their impact.
How CEMs operate in theory depends on the context in which they are utilised. The same CEMs can be beneficial in companies with widely dispersed share ownership, but harmful in a company with a dominant shareholder.
At the opposite side of the argument to OSOV is the principle of "freedom of contract", which is based on the premise that corporations have an inherent right to self-organisation and should, therefore, be left with the ability to organise themselves as they see fit. While none of the countries who participated in the study opted for a purely OSOV or freedom of contract system, the emphasis was put differently. While all but one CEM are available in 40% of the countries studied, all significantly regulate them in order to prevent abuse.
The report also looked at the views of financial investors across the globe. It found that a majority perceived all CEMs negatively, although some (priority shares, golden shares, multiple voting rights shares and voting rights ceilings) are viewed more negatively than others.
The report does not rule out any action against CEMs, as the Commission will wait until an impact assessment has been concluded before finalising its position. However, what is clear, at least from an investor's point of view, is that transparency can go a long way to easing concerns and avoiding any misunderstandings as to a company's governance.