By Echo Wang and Jessica DiNapoli
– Critics of corporate stock structures involving more than one class of shares “lost the argument,” Long-Term Stock Exchange CEO Eric Ries told Reuters, even as many investors he seeks to attract object to companies adopting them.
Silicon Valley-based LTSE launched last year, pitching itself as a platform for companies to list and appeal to long-term investors focused on environmental, social and corporate governance (ESG) issues. It asks companies to commit to disclosures on their environmental and social impact, as well as their executives’ compensation and long-term strategy.
On the hot-button corporate governance issue of multiple-class stock structures, which allow founders of companies to keep control once they take them public, Ries said LTSE was “neutral.” This is despite shareholders and proxy advisers such as Institutional Shareholder Services (ISS) Inc and Glass Lewis & Co, whose recommendations are followed by many ESG-focused investors, criticizing companies for adopting and keeping more than one class of stock.
“I get that there are people who don’t like dual-class shares, but they have lost the argument as far as I can tell,” Ries said in an interview. “Regardless of who has voting control, the board still has a fiduciary obligation to the corporation to do its job.”
Only two companies have so far agreed to list on LTSE, work management app Asana Inc and cloud communications platform Twilio Inc. Both have dual-class shares that give their founders more voting control than other shareholders, and plan to do away with them only in the next seven to 10 years. They have both already listed on the New York Stock Exchange.
Asana said it is deeply committed to benefiting all of its stakeholders. A Twilio spokesperson said it is already serving multiple stakeholders, such as customers and employees.
“Unequal voting rights are symptomatic of poor corporate governance. They take from investors a key tool that we use to address risks and hold companies accountable on ESG and other issues,” said New York State Comptroller Thomas DiNapoli, who administers about $255 billion on behalf of state workers and pensioners.
Ries said there was “very strong empirical evidence” to suggest that companies with multiple classes of shares produce “outstanding” long-term performance for their key stakeholders, including investors.
“The current setup is just the way that it is,” he said. “We don’t have the power to regulate this, but I don’t think it is incompatible with any of our principles.”
The U.S. Securities and Exchange Commission allows publicly listed companies to have two or more classes of shares. Proponents argue that this can shield companies from attacks from activist hedge funds and short-term investors.
Critics counter that the cost for investors of not being able to hold a company fully accountable is too high a price to pay.
ISS head of U.S. research Marc Goldstein said that “the idea that companies need to freeze out public shareholders through unequal voting rights in order to invest for the long-term is highly questionable.”
Most technology start-ups, which LTSE is seeking to attract, go public using a multiple-class share structure. Many investors who object to it still end up buying their shares, because they are attracted to the firms’ financial prospects or find other ESG commitments they have made appealing.
Photo-sharing app Snap Inc became an extreme example of this when it went public in 2017 by affording investors zero voting rights. Its shares are up 300% since then, compared with a 60% rise in the S&P 500.
Snap did not respond to a request for comment.
Some investors argue that the shares of these firms would have performed even better were they single-class.
“Our house view is that companies are leaving a bit of money on the table by going dual class,” said John Hoeppner, head of U.S. stewardship and sustainable investments at Legal & General Investment Management, a firm with $1.7 trillion in assets under management.
The Council of Institutional Investors (CII), which represents investors such as public pension funds and asset managers such as Vanguard Group Inc with trillions in assets under management, wrote to LTSE as it sought regulatory approvals to object to it allowing multiple-class shares, even as it endorsed some of its other ESG principles.
CII general counsel Jeff Mahoney said he would like LTSE at least to require companies to give up the structure after a set time.
“You can’t truly call yourself a long-term stock exchange without requiring a time-based sunset for dual class stock,” said Mahoney.