Investor Alert

Sept. 20, 2021, 7:59 a.m. EDT

Investors want change, but founders like Mark Zuckerberg hold them off

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By Levi Sumagaysay

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What could help keep companies accountable, according to Bartlett: If the Securities and Exchange Commission tied listing requirements to dual-class structures with sunset provisions. And he said index providers “have been very aggressive in pushing for one vote for one share.” For example, in 2017 Standard & Poor’s and FTSE Russell announced they would no longer include companies with multi-class stock structures in their indexes, although some such companies remain because they were grandfathered in.

Year to date, 7% of companies in the S&P 500 index had unequal voting rights, while in the Russell 3000 that number was 9.4%, and in the IT sector-heavy GICS 45 it was 10.2%, according to ISS Corporate Solutions.

“There’s a lot of public focus and concern around companies like Facebook making decisions and the influence and power they have,” said Richard Clayton, research director at CtW Investment Group. “If there was a one-vote-per-share structure in place when Facebook went public, then the company would’ve already made big changes.”

The other shareholder proposals that got majority outside votes at Facebook: one calling for an independent chair (Zuckerberg is both chairman and CEO); another calling for a report on how the company’s encryption technology is affecting child exploitation; and a call for a board report on platform misuse.

See: Facebook opposes adding civil-rights expert to its board

At ride-hailing company Lyft, where the executive officers and other insiders have more than 37% of voting power, the shareholder proposal urging more disclosure of the company’s lobbying got a 39.5% overall vote but a 73.4% outside vote.

“These tech companies are doing well if you look at the value of their stock,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, which represents nearly 300 institutional investors. “Our concerns are about the long-term sustainability of companies and their impact on society. That’s measured over time.”

But the dual-class stock structure is not always bad for a company or society, some experts say.

“There’s shareholder activism that’s short-term in nature,” said Michael Callahan, a law professor at Stanford University who’s also executive director of the Arthur and Toni Rembe Rock Center for Corporate Governance. “It can be distracting for employees, morale and the culture” of a company, especially one whose founder may have a long-term vision that needs time to come to fruition.

Ritter agreed, and mentioned activist investors who push for hostile takeovers that can result in employees losing their jobs, for example.

Checks and balances are important, Callahan acknowledged. He pointed to internal pressure, such as employee activism, which can influence a company’s policies. And shareholders are making a difference, depending on the issue. According to shareholder-advocacy group As You Sow, there were 34 majority votes for ESG shareholder resolutions as of June 2021, beating last year’s record of 21.

“Exxon was a watershed event,” Callahan said, referring to an activist hedge fund winning three board seats at Exxon this year as it agitated for the oil giant to adopt clean-energy policies. “The market can do a lot.”

See: Climate-change pressure builds on Big Oil after activist wins Exxon board seats, court ruling hits Shell

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