A New Era for the ASX or a Governance Minefield?
The Australian Securities Exchange (ASX) may be again contemplating allowing the introduction of dual-class share structures in an effort to re-invigorate its new IPO listings and more closely align with international practices. This development brings to the forefront the ongoing debate regarding the advantages and disadvantages of dual-class shares.
Dual-class share structures involve issuing different classes of shares, each with distinct voting rights and, in some cases, by extension, economic rights. Typically, one class grants enhanced voting power to company founders or insiders, while the other offers reduced, limited or no voting rights to public investors. This arrangement enables founders to access public markets to raise capital without having their voting power diluted and potentially, over time, relinquishing control over the company.
Proponents argue that dual-class shares allow visionary founders and charismatic leaders to pursue long-term objectives without succumbing to short-term market pressures. By retaining decision-making authority and control, founders can focus on sustainable growth, innovation and strategies that may not yield immediate returns but are beneficial in the long run. This insulation from transient investor sentiment can be particularly advantageous in industries requiring substantial research and development investment, such as technology.
In addition, dual-class structures can also protect companies from hostile takeovers and activist investors aiming, for example, for a change of control or significant strategic changes that might not align with the founder’s vision. This stability ensures that management can implement strategies without the constant threat of external interference, fostering an environment conducive to achieving long-term goals.
However, critics contend that dual-class shares can lead to governance issues by creating and entrenching a power imbalance between insiders and public shareholders. This disparity may result in decisions that favour founders and controlling shareholders at the expense of minority investors, potentially leading to conflicts of interest and reduced accountability. For instance, managers with super-voting shares might engage in actions that benefit themselves without sufficient independent oversight.
The limited influence of minority shareholders in dual-class structures may also deter institutional investors who prioritize strong corporate governance and shareholder rights. This reluctance may negatively impact the company’s stock valuation and its ability to raise capital in the future. Additionally, the lack of accountability could result in strategic missteps, as management may not be adequately challenged or held responsible for poor performance. A counter to this is that charismatic founders with entrenched control over their companies may, in fact, be attractive to investors who want to ensure that the founders talent and vision is locked in.
Empirical studies on the performance of dual-class companies present mixed results. Some research indicates that while these companies may exhibit higher profitability initially, their rate of improvement over time is lower compared to firms with single-class shares. This trend suggests that the advantages conferred by dual-class structures might diminish as the company matures, potentially hindering long-term performance.
The consideration of dual-class listings reflects a broader global trend. Major exchanges like those in the United States and, more recently, London, permit such structures to attract high-growth founder led companies seeking public investment without forfeiting control. However, this move necessitates a careful evaluation of the potential implications for investor rights and market dynamics.
To fully grasp the impact of dual-class structures, it is essential to examine real-world examples that demonstrate both the advantages and the potential pitfalls of dual-class shares.
A prominent example is Alphabet Inc., the parent company of Google, which operates under a three-class share structure. The company has Class A shares with one vote per share, Class B shares held by insiders with ten votes per share, and Class C shares with no voting rights. This setup allows co-founders Larry Page and Sergey Brin to maintain significant control over strategic decisions despite holding a minority of the company’s total shares. This control has enabled Alphabet to invest heavily in acquisitions and long-term, high-risk projects such as artificial intelligence, quantum computing and autonomous vehicles, without being pressured by short-term shareholder demands. However, this structure has also raised concerns about accountability, as external investors have limited ability to influence corporate governance. While such autonomy can be advantageous in fostering long-term vision, it has also led to criticism, particularly when the company has faced regulatory scrutiny and public backlash over privacy concerns, misinformation and its business practices. Shareholders with limited voting power have had little say in shaping these critical corporate policies.
Another well-known case is Meta Platforms (formerly Facebook), which also has a dual-class share structure granting CEO Mark Zuckerberg outsized voting power. Zuckerberg’s Class B shares hold ten votes each compared to the single vote per share assigned to Class A shareholders. This setup has allowed him to push forward with controversial strategic decisions, such as rebranding the company around the metaverse and investing billions into virtual reality technology. While such autonomy can be advantageous in fostering long-term vision, it has also led to criticism and public backlash. Shareholders with limited voting power have had little say in shaping these critical corporate policies.
Beyond technology, the media industry has also seen significant use of dual-class shares. The New York Times Company employs a dual-class structure where the Ochs-Sulzberger family retains control, ensuring editorial independence. This governance model has shielded the publication from hostile takeovers and external pressures that could impact journalism. However, some critics argue that it prevents broader shareholder engagement.
News Corp also operates under a dual-class share structure that gives the Murdoch family significant control over the company. The company has Class A shares, which are publicly traded and have no voting rights, and Class B shares, which carry voting power and are largely controlled by the Murdoch family. This structure allows the Murdochs to maintain dominance over strategic decisions despite owning a minority of the total equity. This system has been a point of contention among investors, particularly activist shareholders who have pushed to eliminate the dual-class structure to enhance corporate governance and accountability. The debate has intensified since Rupert Murdoch’s succession planning and the ongoing power dynamics within the family.
In a different sector, Berkshire Hathaway, led by Warren Buffett, utilizes a two-class share system with Class A shares possessing much greater voting power than Class B shares. Unlike other dual-class structures, however, Berkshire Hathaway has not faced significant corporate governance concerns because of Buffett’s widely respected leadership and strong shareholder trust. This case illustrates that while dual-class shares can pose risks, they can be well-received when managed transparently and responsibly.
Conversely, the risks of dual-class shares have been highlighted by companies such as WeWork, which initially sought to go public with a structure that would have given its then-CEO Adam Neumann enhanced voting rights. This plan was heavily criticized, as investors were concerned about a lack of accountability and the concentration of power in a leadership team that had already demonstrated poor governance practices. The backlash led to the collapse of its initial public offering (IPO) and the eventual ousting of Neumann.
Finally, by contrast, Elon Musk’s Tesla and Jeff Bezos’s Amazon do not have dual-class share structures. Tesla and Amazon both have a single-class share structure, meaning each share carries equal voting rights. This is somewhat unusual for founder-led, high-growth US technology companies, as many of their peers (such as Meta and Alphabet) have dual-class shares to entrench founder control.
The potential introduction of dual-class share structures in Australia presents an opportunity for companies seeking to retain control while accessing capital markets, but it also requires safeguards to protect investor interests. Without adequate governance mechanisms, these structures can lead to issues of entrenchment, where company leadership remains in power despite underperformance. To mitigate such risks, regulatory bodies in other jurisdictions have imposed sunset clauses, requiring that dual-class structures either expire after a certain period or be converted upon reaching predefined milestones. Alternatively, they can refreshed by a shareholder vote.
For the ASX, the challenge lies in striking a balance between making the market attractive for high-growth, founder-led companies and ensuring that investor protections remain robust. While examples like Alphabet and Berkshire Hathaway demonstrate how dual-class shares can facilitate long-term success, cases like WeWork serve as cautionary tales highlighting the governance risks associated with excessive concentration of power.
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