ACSI submission to the New Zealand Stock Exchange in response to their consultation paper on Dual Class Shares.
Summary position
Thankyou for the opportunity to respond to the New Zealand Stock Exchange’s consultation on Dual Class Shares(DCS). As representatives of large Australian and international asset owners, who are significant investors in international markets, we see strength in a market which encourages good governance and investor protections that ultimately support long-term shareholder returns.
Equal representation is a fundamental principle
Participation in company meetings is a fundamental shareholder right and a cornerstone of corporate governance. Voting shares is an important way in which shareholders can hold directors to account. As outlined in our Governance Guidelines, “ACSI expects boards to provide a ‘one share, one vote’ capital structure”.
A ‘one share, one vote’ approach supports the central investor duty to appropriately steward companies. By exercising ownership rights, including voting on company resolutions and directly engaging with companies, investors can materially improve investment outcomes and encourage effective market functioning and accountability. By contrast, dual class share structures concentrate voting power and diminish the role of shareholders. This can entrench poorly performing management or corporate strategies, to the detriment of financial returns.
Recent governance failures at dominant-founder-led companies in Australia have directly impacted shareholder value. We believe having a dual class share structure in place could have made these types of governance failures far worse and seen the founders even more deeply entrenched. In the USA, companies with unequal voting rights, such as Paramount, Snap Inc. and WWE, have contributed to particularly poor corporate governance and financial outcomes for investors.1
Rationale remains unclear
There appears to be limited evidence to support the case for removing the equal voting investor protections, as illustrated by the NZX’s reference to ‘low demand ’for dual class share structures in the market.
While the NZX also refers to other jurisdictions and international competitiveness, research commissioned by the Australian Securities and Investments Commission concluded that recent declines in the number of Initial Public Offers (IPO) and listings in Australia “appears to be cyclical”. In the absence of any specific research in respect of the New Zealand market, similar conclusions may be drawn - that recent declines in the IPO market are cyclical and therefore that the introduction of dual class structures is unlikely to be a significant contributor to attractiveness of NZX listing.
Investors have had some longstanding concerns about the differences between the New Zealand and Australian markets for those companies that are dual listed. This change is likely to further threaten interoperability with ASX listing, and call into question the attractiveness oft he New Zealand market.
Outcome is uncertain
In other jurisdictions, it remains unclear whether amendments made to listing rules have driven a higher number of listings. In fact, for recent UK-based companies listing in other jurisdictions, the main issue is often to source a market with strong liquidity2.This is generally driven by a strong and engaged investor base, which is often attracted by high governance standards. Removing investor protections, however, can make a market riskier and less attractive due to the increased concentration.
Investor protections proposed are currently insufficient
While we recommend that rules allowing DCS share structures are not implemented, if NZX progresses with its proposal, we recommend that investor protections are strengthened. We note that NZX has proposed some investor protections, including availability of DCS structure only to newly listed companies, voting cap, DCS committees, disclosure requirements and the reversion to ‘one share one vote’ for some specific resolutions. While we support these protections, they remain insufficient. For example, the proposed independent director requirement in section 2.17 is likely to be an ineffective measure, as independence within a controlled company is difficult, particularly if that independent director resigns. In addition, with 10-1 voting rights and the current level of voting at AGMs the ratio will, in many cases, see full voting control. Furthermore, the definition and criteria for the Permitted Superior Holder Group should be narrowed to limit the Group and prevent transfer to those who were not contemplated or involved at listing.
Although some evidence makes the case for DCS structured companies’ out performance, there is also notable evidence that misalignment between voting rights and equity stakes adversely impacts value. In any event ,the literature suggests that any potential financial advantages (if they exist) of DCS structures recede rapidly, pinpointing that any benefits dissipate between 6 and 10 years. Consequently, many jurisdictions focus on time bound sunset provisions.3 Therefore, if the NZX does introduce differing share classes, we recommend a maximum 7 year time-related sunset provision for any alternative share structure.
