SEC FAILURE OF MISSION:
US AGENCY CHARGED WITH INVESTOR PROTECTION REFUSES TO ALLOW SHAREHOLDERS TO VOTE ON DUAL CLASS UNDERWRITING
Frederick Alexander, CEO of The Shareholder Commons
Across the United States and around the world, political democracy is on the defensive as politicians try to limit their accountability to citizens. The trend is the same in business, as more and more public corporations try to use “multiclass” voting structures to avoid accountability to their own shareholders. Regrettably, the SEC Staff has decided to deny shareholders the right to vote on whether their own companies can continue to facilitate this retrenchment.
This year, The Sharehoder Commons, the nonprofit where I serve as CEO, helped shareholders at Goldman Sachs and JPMorgan put forward proposals addressing the increasing use of multiclass share structures. The SEC allowed each of them to exclude the proposal, on the basis that it did not relate to a significant issue that transcended the ordinary business of either company.
These decisions represent a serious failure on the part of the SEC to satisfy its mandate as an investor protection agency.
The multiclass phenomenon: an absolute lack of accountability
As many citizens worry that corporate juggernauts like Facebook and Alphabet (the parent company of Google) are not being held accountable by government, few realize that the managers of these companies are not even accountable to their own shareholders.
At these and many other companies, a handful of insiders own super voting stock that locks in perpetual control for founders and their families. As a result, there is nothing that shareholders can do if a majority of them are unhappy with corporate leadership. The CEOs of these companies become leaders-for-life, with power that spans international borders and that can rival that of medium-sized countries.
This creates a dangerous dynamic because these insiders do not only have great power: they also have uniquely poor incentives. Unlike the average shareholder, who is diversified and interested in a healthy economy overall, these new corporate autocrats are entirely focused on their own companies and thus benefit from decisions that sacrifice important social and environmental systems in order to boost the value (and power) of their company. As Nobel Laureate Oliver Hart and a co-author noted, “initial entrepreneurs are not well-diversified and so they want to maximize the value of their own company, not the joint value of all companies.”
For much of the 20th century, major U.S. stock exchanges restricted these structures, but the limits have fallen away as for-profit stock exchanges compete for business. The phenomenon is increasing within the U.S. at an alarming rate: More than 20 percent of the companies listing shares on U.S. exchanges between 2017 and 2019 had a dual class structure, and from less than 5% of IPOs in 1984 and the percentage is now approaching 25%. But this understates the problem:
By some reports, more than a third of the money raised in IPOs may well be going to corporations with multiclass structures.
SEC bars shareholders from voting on facilitation of multiclass offerings
This proxy season, The Shareholder Commons helped shareholders make proposals at Goldman Sachs and JPMorgan Chase, two of the leading investment banks for multiclass public offerings. The proposals asked the banks to report on how participating in these offerings would affect the economy and diversified shareholders. The SEC refused to allow the shareholders of either bank to vote on this question, concluding that this was not an important policy issue that shareholders should be allowed to vote on.
As we explained in our letter to the SEC Staff asking it to allow inclusion of the proposal, this is in fact a long-running policy concern. This was an extraordinarily disappointing decision. It is hard to imagine a more important policy issue for shareholders to vote on, as more and more companies become unaccountable to their owners, and as these companies have more sway over the economy. In a 2018 speech, SEC Commissioner Kara Stein addressed the broad social policy concerns created by dual class structures:
Structures where a minority of insiders lock out the interests and rights of the majority may also have collateral effects on our capital markets. They may be harmful not just for those companies, their shareholders, and their employees, but for the economy as a whole.
The SEC’s Investor Advocate was more blunt in a recent speech:
In my view, what we now have in our public markets is a festering wound that, if left untreated, could metastasize unchecked and affect the entire system of our public markets. The question, then, is what can be done to avoid the inevitable reckoning.
We hope that the SEC will reconsider its position before the next proxy season. Our economy needs more accountability, not less.