CalPERS is considering a policy of not investing in the initial public offerings (IPOs) of dual-class companies where shareowning is structured so that a minority will control the majority of the votes. From what I have seen, CalPERS has already opposed those that exist but this step would allow the retirement system to avoid purchasing shares in such companies as they enter the market, even though they may be included in various indexes included in the fund’s portfolio.
The Global Governance Program Update (pages 7-8) to the CalPERS board included a section, “IPO Governance Expectations,” which listed several significant events in 2012 related IPOs that focused a spotlight on poor corporate governance structures:
- The Jumpstart our Business Startups Act (JOBS Act) was signed into law which provides for the exemption of emerging growth companies (EGC) from certain securities laws and investor protections for up to five years.
- Carlyle Group attempted to include a provision in its IPO governing documents preventing shareowners from resolving claims against the company through the courts.
- Increasing prevalence of dual class voting structures.
The program reported they are currently developing an IPO governance strategic plan using the
- Develop an IPO governance expectations document, explaining the governance expectations CalPERS has for public companies, vis-à-vis the JOBS Act.
- Address core governance standards of accountability and transparency such as removing dual class, classified, or plurality voting structures.
- Seek support for CalPERS IPO governance expectations from our private equity partners, private equity industry associations, and the investment banking industry.
- Seek support through coalition building including other global investors, outreach to fund managers, and investor forums and networks to which CalPERS is a member.
- Explore an equity trading strategy that does not provide capital for IPOs coming to market which do not meet CalPERS governance expectations.
As reported by WSJ:
The move comes after a spate of recent high-profile listings using the multitier share structure, including those of social network Facebook Inc., FB -2.10% U.K. soccer club Manchester United Ltd. MANU +1.53% and distressed-fund manager Oaktree Capital Group.
One in eight of this year’s 98 U.S. IPOs listed in the year through Aug. 16 had more than two classes of shares, according to research provider Dealogic. When Dealogic started tracking this metric in 2009, the figure was almost one in 12.
Sarah Wilson, chief executive of U.K. proxy voting firm Manifest, is quoted in the article: “This sends out an important message. Where Calpers leads, others will follow.” (Calpers Sets Sights on Dual-Class Stock Structures, WSJ, 8/20/2012)
The CalPERS report also highlighted proxy voting for the second quarter of 2012. CalPERS voted 67,072 proposals in the quarter, supporting 88% of management proposals and 65% of shareowner proposals.
The idea of boycotting dual-class IPOs is certainly a good move by CalPERS. We need more democracy in corporate governance so that boards can be held accountable, not less. Dual-class structures often appear to work well when everything is going right for a company. However, when corporate strategies fail, dual-class structures allow boards to ignore shareowners and needed corrections are ignored or go unrecognized.
Some companies have legitimate gripe that many shareowners fail to properly analyze proxy issues. Additionally, I can understand directors sometimes see proxy advisors as poorly informed. “Companies seem to be more willing now than they were 18 months ago to publicly disagree with ISS and other advisers,” explains Francis Byrd of Laurel Hill Advisory Group.
Corporate Board Member’s Brenda Sheehan writes (Flexing Corporate Muscle, 4th Quarter, 2012):
At the end of May, a total of 52 companies had filed supplemental proxy materials in response to ISS complaints about compensation practices. That is more than double the number of companies that had done so at the same time last year…
Companies that have spoken out recently include retailer JCPenney, which took issue with the peer group ISS used for its compensation comparison of the company, as well as hotel chain Marriott, which made a similar public filing regarding peer groups. Marriott criticized ISS for omitting its two main rivals—Hyatt and Starwood—from the peer group it used for the pay-for-performance analysis. Ironically, Marriott itself appeared in the peer group ISS used for Starwood. Qualcomm, Walt Disney, and Piedmont Natural Gas have also had public debates with advisory firms on this issue.
The cure isn’t dual class structures but incentivizing proxy advisors so to create more competition between them, ensuring their advice goes to all shareowners (not just subscribers), and that they are paid enough to devote the necessary resources to fully analyze companies, especially their unique circumstances.
I am working with Mark Latham of VoterMedia to remedy this problem. See Costco: Proxy Advisor Contest Proposed. Similar proposals can be submitted to other companies. Let’s not march toward dictatorship just because it is easy. Democracy takes a little more work but pays off in the long-run because more brains are engaged. Your thoughts?