14 November 2007
As its meeting on 14 November 2007, the Steering Group on Corporate Governance agreed on a common position based on the OECD Principles of Corporate Governance about the issue of whether there should be proportionality between ownership and control (also known as one-share-one-vote) in listed companies. This marks the second report in a series of studies investigating the application of the OECD Principles of Corporate Governance to prominent issues in contemporary public debate.
[A link to the first report can be found at the bottom of the page]
Summary of main findings
Proportionality between corporate ownership and control implies that any shareholder owns the same fraction of cash flow rights and voting rights. Securities-voting structures that depart from the principle of proportionality have sometimes caused concern: first, discrepancies between ownership and control can exacerbate the misalignment of the incentives of controlling and non-controlling shareholders; and, second, a separation of voting and cashflow rights may compromise the efficiency of markets for corporate ownership and control. The question facing authorities is whether these potential drawbacks actually manifest themselves and, if so, whether their economic costs are sufficiently large to justify regulation.
The debate about proportionality resurfaced recently when the European Commission commissioned a study examining the use of Proportionality-Limiting Measures (PLMs) in a number of EU and selected other countries with the purpose of establishing if a case can be made for harmonising regulation of such mechanisms. However, based on the study the European Commissioner for the Internal Market and Services, Charlie McCreevy, concluded there is no need for action at EU level on this issue.
The OECD Principles of Corporate Governance do not take positions on proportionality. They do, however, recommend against voting right discriminations within each class of shares and in favour of transparency and disclosure of disproportionate arrangements. Moreover, the Principles’ recommendations on equitable treatment of shareholders militate against the abuse of non-controlling shareholders in consequence of disproportionality. The Principles’ focus on overall economic outcomes could serve as an argument for regulating proportionality if non-trivial negative economic consequences were demonstrated.
A large number of mechanisms for separating voting rights from cash flow rights in listed companies are legally available in most OECD countries. Among the many options for leveraging voting rights, most jurisdictions and market places allow multiple share classes and virtually all accept the reliance on pyramidal or cascading shareholdings. Mechanisms for locking in control in most jurisdictions include voting right ceilings. In addition, a number of instruments that do not in themselves depart from proportionality can be used to bolster the effect of PLMs, including in most jurisdictions cross-shareholdings and shareholder agreements. In other words, proportionality cannot be addressed simply in terms of voting right differentiations of companies’ common stock.
Empirical studies demonstrate that whereas PLMs are widely available in most countries the number of companies that actually avail themselves of such mechanisms is more limited. This is attributed to a number of factors including tax rules (e.g. the absence of pyramids in the United States), market pressures (e.g. the low incidence of voting right differentiation in the United Kingdom) and the varying scope for extracting private benefits across jurisdictions. Moreover, the mechanisms are to some extent substitutes and hence normally not applied conjointly.
There is neither a clear trend in the availability nor in the implementation of PLMs. Some transition economies have taken steps to suppress voting right differentiations in recent years as part of national reform efforts to improve corporate governance. Other OECD members (e.g. Finland and Italy) on the other hand have liberalised rules bearing on PLMs. Regarding the actual implementation of PLMs the clearest trend detected by cross-country studies is that dual-class capitalisation has become rarer over the last decade.
Studies of share prices indicate that non-controlling investors extract a discount, and hence obtain higher returns, in compensation for the presence of PLMs. These discounts appear vary according to the quality of legal and regulatory frameworks, reflecting the perceived risk of expropriation by the controlling shareholders.
Institutional investors and investor associations have been active participants in the recent debates over proportionality. They largely support unified voting structures in companies’ common stock (“one-share-one-vote”) and other measures to avoid disproportionate control, and several of their representative bodies have issued recommendations to this effect. However, these investors do nevertheless invest in companies featuring PLMs if offered sufficient value discounts. Their position seems based partly on a perception of missed opportunities relative to a situation without PLMs, partly on fears of falling victims to an excessive extraction of private benefits. Institutional investors' position on high-voting shares in some recent takeover bids could moreover indicate that they themselves have come to place an increasing value on influence.