Senator Elizabeth Warren is a former Harvard business law professor, so she ought to know better than to peddle this sort of nonsense:
United States Senator Elizabeth Warren (D-MA) today sent a letter to New York Stock Exchange (NYSE) Vice President John Carey and NASDAQ Executive Vice President & General Counsel Edward Knight, urging their organizations to consider proposing rules requiring "one share, one vote" corporate structures for listed companies.
Sen. Warren asks NYSE and NASDAQ to declare companies ineligible for an initial listing if they have unequal voting rights, and to prohibit already listed companies from issuing additional classes of common stock with unequal voting rights - a request made by the Council of Institutional Investors in an October letter. "If a company goes to the public markets to raise money, long-term ordinary common stock investors - a category that includes directly or indirectly millions of retirees and workers - should be entitled to certain basic rights," writes Sen. Warren. "One of the most basic of those rights is one-share-one-vote."
Sen. Warren highlights several problems with unequal voting arrangements. She notes that under these structures, "Long-term investors will have limited recourse in holding management and the board accountable if the company heads in a wrong direction." Sen. Warren's letter asks NYSE and NASDAQ to issue proposed rules addressing this issue for public comment.
I've written extensively about one share/one vote over the years and am confident that everything Senator Warren said here was wrong.
First, shareholders do not have "rights," if by right you mean something “that is conceived as part of natural law and that is therefore thought to exist independently of rights created by government or society.” Black's Law Dictionary 1323 (7th ed. 1999). Instead, shareholders "rights" are defined entirely by a contract comprised of the corporation's organic documents and the default rules of corporate law. See Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del.2012) (noting that the articles of incorporation are regarded as contracts between shareholders and the corporation and are interpreted as such). There has never been a time in US history in which those default rules mandated one share/one vote. (I trace this history in Revisiting the One-Share/One-Vote Controversy: The Exchanges’ Uniform Voting Rights Policy, 22 Securities Regulation Law Journal 175 (1994).)
What we have here thus is Sen. Warren engaing in what her Harvard colleague Mary Ann Glendon calls Rights Talk, in which the term right is invoked as a sort of trump card to delegitimate opposistion.
As I also explain in Revisiting the One-Share/One-Vote Controversy, while some argue that equal voting rights help reduce agency costs by ensuring that management accountability to shareholders, this argument proves unpersuasive on close examination. Shareholder voting as such is a relatively inefficient accountability mechanism. The shareholders’ incentives to be rationally apathetic, coupled with their relative powerlessness, renders them the corporate constituency perhaps least able to hold management accountable for misbehavior.
To be sure, voting rights enable shareholders to indirectly hold management’s feet to the fire via a proxy contest or by selling their shares to a takeover bidder. From this perspective, dual class capital structures are problematic not because they deprive shareholders of voting rights, but because they shield management from exposure to the full force of these other accountability mechanisms. Having said that, however, the anti-takeover effects of dual class stock do not justify prohibiting such a capital structure. Proscribing dual class stock because of its takeover effects puts one on a very slippery slope indeed. Taken to its logical extreme, the argument against dual class stock based on its anti-takeover effect would justify a sweeping prohibition of all effective takeover defenses, a solution that no court or legislature has been willing to adopt.
Finally, Senator Warren ovelooks the a critical difference between one share/one vote capital structures created in the corporation's articles prior to the IPO and one created after the company has gone public via charter amendment or otherwise. While management’s conflict of interest may justify some restrictions on some disparate voting rights plans, it hardly justifies a sweeping prohibition of dual class stock. After all, not all such plans involve a conflict of interest. Dual class IPOs are the clearest case. Public investors who don’t want lesser voting rights stock simply won’t buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off is offered by the firm in recompense. In effect, management’s conflict of interest is thus constrained by a form of market review.
At present, stock exchange listing standards permit dual class capital structures only when the company adopted one before going public. As we've seen, there is no policy justification for restrictions on dual class stock capital structures in that context.
In sum, Senator Warren blew it again.
