One Share One Vote and the Importance of Shareholder Equality

In the United States, the one share, one vote principle is a cornerstone of corporate governance, ensuring that each shareholder has an equal say in the company's decision-making process.

This principle was established in the Delaware General Corporation Law in 1899, which states that "every shareholder shall have one vote for each share of stock owned by him."

The one share, one vote principle promotes fairness and equality among shareholders, preventing a small group of large shareholders from dominating the company's decisions.

Shareholders with a single share have the same voting power as those with a thousand shares, giving every investor a voice in the company's future.

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The US voting system is a complex process, but it's designed to ensure every citizen has an equal say.

In the US, voting is a fundamental right granted to all citizens aged 18 and above.

The system is based on the principle of "one share, one vote", where every citizen has one vote, regardless of their wealth or social status.

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However, the voting process is not without its challenges, as seen in the example of the 2000 presidential election, where a disputed result in Florida led to a Supreme Court intervention.

To ensure the integrity of the process, voting systems have undergone significant changes over the years, with the introduction of electronic voting machines and online registration.

Despite these advancements, issues such as voter suppression and gerrymandering continue to plague the system, as highlighted in the example of the 2013 Shelby County v. Holder case.

In many states, voters are required to show identification at the polling station, with some states allowing alternative forms of ID, such as a utility bill.

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Dual class share structures can obscure proxy voting signals, making it difficult to accurately assess minority shareholder sentiment.

Investors are increasingly scrutinizing dual class share structures, with the Investor Coalition for Equal Voting Rights advocating for limits on the lifespan of arrangements that deviate from the one share, one vote principle.

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Since 2019, there's been an uptick in the proportion of companies in the US going public with differential voting shares, according to the Council of Institutional Investors' semi-annual tracking of IPOs.

Insiders' super-voting rights can skew corporate proxy vote outcomes, often significantly underrepresenting the level of opposition to management and the board on important corporate governance or sustainability topics.

In the 2024 proxy calendar, our analysis showed that when insiders hold disproportionate voting power, outside shareholders are less supportive of management, and that they favor a one share, one vote policy when polled directly.

At Lennar Corp, Executive Chairman and Co-Chief Executive Officer Stuart Miller has voting rights over 65.6% of Class B stock, which carries 10 votes a share, compared to one vote per share of the more widely held Class A stock.

This affords him 38% of total voting control, since holders of Class A and Class B shares vote together as a single class.

Shareholders appear less willing to support pay practices at S&P 500 companies with dual class share structures, with an estimated 85.6% support compared to 92.9% reported support.

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The average support for pay arrangements at S&P 500 companies with one share, one vote arrangements was 89.3%, a 7.3 percentage point gap from the reported support at companies with dual class structures.

Insiders more frequently prefer a triennial vote cadence for say on pay, which is more likely reflected in the outcome of a say on pay frequency resolution when they control significant voting power.

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Companies with dual class share structures often have insiders controlling significant voting power, which can obscure proxy voting signals.

Insiders' super-voting rights can skew corporate proxy vote outcomes, with their votes often underrepresenting opposition to management and the board on important corporate governance or sustainability topics.

In the 2024 proxy season, 22 companies in the S&P 500 had dual class share structures with significant differential voting rights.

Shareholders appear less willing to support pay practices at companies with dual class share structures, with an estimated 85.6% of minority shareholder support compared to 92.9% reported support.

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The average support for pay arrangements at S&P 500 companies with one share, one vote arrangements was 89.3%, revealing a 7.3 percentage point gap between reported and adjusted say on pay support.

Dual class share structures limit shareholders' opportunities to weigh in on pay practices, and when they do get to vote, this arrangement understates shareholders' opposition to pay practices.

In the 2024 proxy season, five shareholder resolutions came to a vote asking companies to collapse their dual class share structures, with four likely passing with majority support of the shares voted by non-insider shareholders.

Dual class share structures can obscure proxy voting signals, making it difficult to determine minority shareholder sentiment.

Insiders holding significant voting sway via their superior voting rights can skew corporate proxy vote outcomes, often underrepresenting opposition to management and the board on important corporate governance or sustainability topics.

At Lennar Corp, Executive Chairman and Co-Chief Executive Officer Stuart Miller has voting rights over 65.6% of Class B stock, which carries 10 votes a share, compared to one vote per share of the more widely held Class A stock.

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Companies with dual class share structures reported an average of 92.9% support on say on pay resolutions in the 2024 proxy calendar, but adjusting for insider super voting influence puts minority shareholder support at 85.6%.

A 7.3 percentage point gap between reported and adjusted say on pay support at companies with dual class structures reveals that insiders' super-voting rights can significantly influence vote outcomes.

In the 2024 proxy calendar, at least four companies had non-insider-adjusted voting support that appeared to be at least 10 percentage points lower than the vote outcome reported by companies.

Dual class share structures limit shareholders' opportunities to weigh in on pay practices and, when they do get to vote, this arrangement understates shareholders' opposition to pay practices.

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Recently listed companies have fewer CEMs than large companies, which means fewer occurrences of CEMs.

This difference in CEMs between recently listed and large companies is likely due to their varying stages of development.

Fewer CEMs also mean fewer combinations of CEMs in recently listed companies, making it easier to understand and analyze their ownership structures.

The reduced complexity of ownership in these companies can make them more attractive to investors and other stakeholders.

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Investors tend to view Control Enhancing Mechanisms negatively, which can impact their investment decisions. 80% of investors in the study expect a discount of 10-30% of the market price.

Investors are not alone in their concerns, as the study's findings have been met with enthusiasm by organizations such as Institutional Shareholder Services Europe (ISS Europe) and the European Corporate Governance Institute (ECGI). Jean-Nicolas Caprasse, Managing Director of ISS Europe, believes the study has shed light on proportionality and fostered greater transparency in the market.

The study was conducted by a team of experts, including Institutional Shareholder Services Europe (ISS Europe) and Shearman & Sterling LLP (S&S), a well-known international law firm. The study aimed to identify existing deviations from the proportionate allocation of ownership and control across EU listed companies.

The contractors were not asked to support any particular policy option, but rather to facilitate the Commission's evaluation of the current regime concerning shareholders' voting rights. This evaluation will help determine whether the current system is an obstacle to financial market integration in the EU.

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Common deviations from the proportionality principle include multiple-voting rights, voting-rights ceilings, ownership ceilings, non-voting shares, and under certain circumstances, other instruments such as non-voting preferential shares and company pyramids.

Here are some of the common Control Enhancing Mechanisms identified in the study:

These mechanisms are available in most countries, despite different legal traditions. The freedom of contract principle is applied to varying degrees in all countries.

In many countries, the "one share, one vote" principle is enshrined in law. This ensures that each shareholder has an equal say in the company's decision-making process.

The concept of "one share, one vote" is often linked to the idea of shareholder democracy. Shareholders have a direct stake in the company's performance and are entitled to participate in key decisions.

For instance, in the UK, the Companies Act 2006 requires companies to hold annual general meetings (AGMs) where shareholders can exercise their voting rights. These meetings are a crucial part of the "one share, one vote" principle.

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Shareholders can vote on a range of issues, including the appointment of directors and the approval of financial statements. They can also vote on resolutions that affect the company's operations and strategy.

In practice, the "one share, one vote" principle means that each shareholder has one vote per share held. This ensures that the interests of all shareholders are represented and that no single shareholder has undue influence over the company's decision-making process.

The "one share, one vote" principle has been in place for many years and has helped to promote transparency and accountability in corporate governance.

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One share, one vote is a concept that influences the dynamics of the market for corporate control. The allocation of voting rights to securities determines which securities a party must acquire in order to win control.

The assignment of income claims to the same securities determines the cost of acquiring these voting rights. This cost can be a significant factor in determining the terms of a control change.

A corporation's securities can be designed in various ways, but one share/one vote is often the most desirable structure. This is because it sets the cost of acquiring control to be as large as possible, consistent with a control change occurring whenever it increases shareholder wealth.

The benefits of control can be divided into two classes: private benefits and security benefits. Private benefits refer to benefits the current management or the acquirer obtain for themselves, but which the target security holders do not obtain.

The security benefits refer to the total market value of the corporation's securities. The assignment of income claims to voting rights determines the extent to which an acquirer must face competition from parties who value the firm for its security benefits rather than its private benefits.

Here are the two classes of benefits from control: