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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chair of the Investor Coalition for Equal Votes and senior investment manager at Railpen
This week Reddit has gone public on the New York Stock Exchange in a highly anticipated listing. However, the excitement over the initial public offering has diverted attention from an important issue that could have greater ramifications for capital markets.
Reddit has listed with unequal voting rights under a dual-class share structure. This means some shareholders — mostly insiders and pre-IPO investors — hold superior voting rights over those for independent shareholders
In doing so, the company is contributing to a trend that undermines a fundamental tenet of good corporate governance and may potentially cause further detriment for long-term investors and the savers served by fund managers and pension funds.
For a company that derives success from curating a democratic culture of debate among users, this partial disenfranchisement of investors is perhaps surprising. It is also out of step with predominant IPO company practice. Data from the Council of Institutional Investors shows that for six of the past seven years, more than 80 per cent of US IPOs opted for one-share, one-vote structures immediately upon listing. And many of those that did list dual-class shares eschewed Reddit’s particular model of long-term misalignment by limiting superior voting rights with automatic, time-based sunset provisions.
The US stock market’s success is widely envied by others. In the UK, where equity valuations have lagged behind the US’s significantly, policymakers are considering measures to help bridge the performance gap and attract overseas capital. A reform to listing rules is one such option, and current proposals mean we could see greater use of dual-class share structures at UK-listed companies in the near future.
But analysis shows that the perception that such structures contribute to a company’s success, and by extension the ability of a listing regime to attract businesses, is misplaced. Recent research by the Investor Coalition for Equal Votes, which is co-chaired by Railpen and the CII, highlights how the presence of dual class shares makes it difficult for independent shareholders to hold corporate decision makers to account.
More broadly, we found that any potential financial advantages of dual class shares tended to recede rapidly. This is why ICEV members, which collectively manage some $3tn of assets, support companies listing with dual-class shares only where they institute a mandatory time-based sunset clause of seven years or less from the IPO date, after which all classes of share convert to one share, one vote.
For institutional investors with a fiduciary duty to invest in the best interests of our clients, dual-class share structures significantly dilute our ability to exercise our obligations. This makes it harder to encourage better long-term performance and risk management at portfolio companies, potentially leading to worse outcomes for members.
Given that such structures do not deliver financial advantages over the long term, we do not think listing regimes should put faith in their ability, and that of other dilutions of investor protections, to supercharge domestic capital markets. Research on the topic has demonstrated corporate governance is not a priority concern for companies choosing a listing jurisdiction.
For instance, a report from UK Finance and EY found the “ease and cost of being publicly traded” was less important to companies choosing a listing jurisdiction than access to a strong investor base, valuation and research coverage and liquidity. Instead of reducing standards and making a market less appealing to investors they are keen to attract, UK policymakers should focus on the fundamentals. That is reminding global investors of the unique selling point that a robust regime of investor protections provides; creating a smoother funding journey for high-growth companies; and working to increase the pool of retail investors.
Reddit itself has reserved a “significant” number of shares at the IPO price for some of its users. This laudable move is undermined by its adoption of an extreme approach to dual-class shares, listing without any automatic time-based sunset clause for them.
As a flagship IPO for 2024, it is a disappointing precedent to set. ICEV has written to Reddit’s leadership to express our disapproval of the decision and convey the importance of one share, one vote arrangements. We will continue to engage both with other pre-IPO companies and policymakers to make the case for listing with a share structure that works in the long-term interests of companies, shareholders and savers alike.
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