Canada Should Fight for Shareholder Rights

At some point, someone tries to take things just too far, and all hell breaks loose. This is what happened when Snap Inc., owner of the Snapchat messaging app, went public earlier this year in the United States with shares that gave investors no vote at all on virtually all corporate matters.

The backlash was swift, and fierce, with major institutional investors asking the companies that create the major stock indexes to keep companies such as Snap, which disenfranchise their stockholders, out of the indexes.

The index builders have acted. On Monday, S&P Dow Jones Indices said it would no longer add companies with multiple share classes to the S&P composite 1500, from which the S&P 500 is drawn. The proprietors of the Russell indexes have also drafted a new policy, and MSCI, another major index provider, is reviewing the issue.

From outrage to solution, in a matter of months.

The entire drama, however, has taken place south of the border, with Canadian investors on the sidelines. The S&P announcement noted it isn’t introducing the policy for any of its other indexes, which include the S&P/TSX composite and the S&P/TSX 60. In Canada, the market benchmarks will continue to admit companies with dual share classes, which give different voting rights to different categories of investors.

Why should S&P be so tough on the issue in the United States but not in Canada? Dual-class companies are likely even more prevalent here.

According to Toronto corporate lawyer Carol Hansell, there are 10 dual-class companies in the S&P/TSX 60. Major names include Rogers Communications Inc., Shaw Communications Inc., Bombardier Inc., Canadian Tire Corp. Ltd. and Power Corp. of Canada, which started its dual-class structure in 1925.

However, a spokeswoman for S&P Dow Jones Indices says, “Investors have not raised the issue for Canada.” And that is just about right, if the standard is a Snap-like outcry.

But the major Canadian shareholder-advocacy groups have expressed their views in the past. The Shareholder Association for Research and Education opposes unequal voting rights and recommends votes against them in its proxy-voting guidelines.

The Canadian Coalition for Good Governance came out with its most recent policy statement on the issue in 2013, but said at the time “there is not unanimity among CCGG members as to the governance principles which should apply to [dual-class share] companies in Canada.”

What’s the big deal, anyway? “No-vote shares are a full-scale repudiation of the one-share, one-vote principle that we believe is core to good corporate governance,” said Amy Borrus, deputy director of the Council of Institutional Investors, an alliance of U.S. pension funds and other big firms, which applauded the S&P decision.

“They rob shareholders of the means to hold management and boards accountable, and they amount to a perpetual-control device that lets founders hang on to their power over the company even as their economic stake shrinks over time.”

And the common response – “If you don’t like it, don’t buy the stock” – isn’t practical, she says, because “many investors who may abhor non-voting shares may end up owning them anyway if major index providers end up including these classes of shares in their index.”

While Snap and its non-voting shares were the impetus for the policy change in the United States, the new policies can also apply to companies with differential rights, such as one class of shares getting 10 votes to the public investors’ one.

In the case of the FTSE Russell indexes, the new policy says public investors – those outside company founders, directors and management – must have at least 5 per cent of the voting rights. This will first apply to companies not currently on the index. All those already part of the FTSE Russell indices have five years to come into compliance.

For its part, S&P has grandfathered all existing multiclass-share companies, such as titans Alphabet Inc. and Facebook Inc. (“We recognize no one is going to boot them out of their index,” Ms. Borrus said. “Not going to happen.”)

Canadian investors may also see the need to make exceptions. Ms. Hansell, a specialist in governance and proxy matters, says the United States “doesn’t have the same history as we do with family-owned companies that go to the capital markets.”

There was a bit of furor over dual-class structures in Canada in 2010, when Magna International Inc. paid founder Frank Stronach a significant premium to give up his special-voting shares. But the anger was not replicated in any recent Canadian IPOs with unequal voting rights, such as Stingray Digital Group, Canada Goose Holdings Inc., Cara Operations Ltd. and Shopify Inc.