The FCA has made plenty of mistakes, but they are right about dual class share structures — these will encourage new listings and tackle the London Stock Exchange’s persistent short-termism, says Daniel Valentine
The Financial Conduct Authority is preparing reforms to the listing regime of the London Stock Market which have been described as “the biggest overhaul of the listing rules in 30 years”. Meanwhile, to critics the proposals represent evidence of desperation as the FCA slashes investor protections whilst bottom fishing for new IPOs.
The reform which has received most attention from the FCA’s package is the proposal to take a more permissive approach to dual-class share structures.
The logic behind dual-class share structures is to allow company founders to sell equity in their company without giving up control. These devices achieve this by creating two classes of stock, one with extra voting rights for founders and another with lesser voting rights for the general public — or no votes at all.
Profit sharing and company control are therefore separated, with shareholders being offered a share of profits but not a share of control. Dual-class share structures are hated by many governance purists who idolise “one share one vote” and the board’s independence from management. The dual-class structure however, has some beneficial effects; it encourages new firms to list substantial proportions of stock on the market, and it creates a more stable company, since the company is able to pursue a long-term plan insulated from market turbulences including activist shareholders, proxy battles, hostile takeovers and short-termism.
Dual-class stock structures are extremely popular on American stock exchanges, in fact it has become the default structure for tech IPOs. Many successful technology companies have selected these structures at the initial public offering stage, including; Google Facebook, Zoom, Meta, Snap, Shopify, Alphabet, Palantir, Snapchat, Lyft, Airbnb, and Dropbox. Dual-class shares are also common in Hong Kong and Singapore, territories where family succession planning is crucial. Attempts to retro-fit dual-class share structures onto companies which were created with a single share structure have been much less successful
Dual-class stock has a well-recognised potential for powering innovation. Protected from shareholder pressure for dividends, companies can reinvest profits in research and capex, creating groundbreaking innovations. Many UK-based retail investors and most institutional investors prefer dividends over high levels of capex, the dual-class share structure tips the balance of power towards managers and away from investors to give managers greater strategic latitude. The quid pro quo that investors demand in exchange is that the company selects a CEO of exceptional vision and remarkable ability, in whose hands the company’s future is secure.
It is the view of CGIUKI that dual-class structures have a role in a stock market and that permitting dual-share structures at IPO may help London to overcome its persistent short-termism and begin to attract tech listings again.
When Henry Ford founded his company in 1903, it took him only five months to make a profit. The time horizons to profitability are typically much longer now. It took Amazon nine years, and Twitter and Uber took twelve years a piece. Do we think that UK investors would allow boards such long periods of grace? The UK has a persistent problem with investors preferring dividends over capex, and dual-class structures enables managers to invest in capital expenditure with long pay-off horizons.
In reality, many investors neither have the appetite nor the skills to contribute to corporate decision-making. They simply want the company to pick the right leaders and the right strategy. Dual-class stock can help with both of these by separating ownership from control. We encourage investors and policy-makers to consider this element of the FCA proposal seriously. The London market has become notoriously short-termist, and dual-class stock may be exactly the antidote that London needs.
Daniel Valentine is head of communications at the Chartered Governance Institute UK & Ireland
