Advertisement

Canada's long tradition of dual-class shares is under intense and growing pressure from shareholders frustrated by a system they call inequitable.

Critics say the very share structures they are opposed to are the ones preventing rapid progress because they give those holding these shares too much power.

"It's pretty much entrenched," said J. Richard Finlay, a corporate governance expert and outspoken advocate of shareholder rights at the Toronto-based Centre for Corporate & Public Governance. "The deck is really stacked against change in this area, and the interests of ordinary shareholders."

Anathema in the United States, dual classes of shares -- in which similar shares are separated into different classes with different voting rights -- are endemic in Canada.

	More than their fair share? To see a chart showing the impact of supershares on corporate voting power in various companies, click here.
	Power shares
	Multiple voting shares with the largest punch (Ratio of votes per multiple voting share versus subordinate voting share) Magna International Inc. 500:1 Teck Cominco 100:1 Celestica Inc. 25:1 FirstService Corp. 20:1 GTC Transcontinental 20:1 Royal Group Technologies 20:1 Metro Inc. 16:1 Four Seasons Hotels Inc. 15.2:1 The Globe and Mail

Report on Business did a sweeping review of the boards and governance practices of 270 companies that comprised Canada's benchmark S&P/TSX index at Sept. 1. A study of the boards of these companies shows 60 of them -- more than one in five -- maintain dual classes of shares.

In some cases, the subordinate voting class receives no vote, to the one vote per share allotted to the other class.

In other cases, the supervoting shares receive multiple votes, compared with the single vote attached to subordinate shares. In the most extreme example in Canada, auto parts maker Magna International Inc. supervoting shares receive 500 votes to other shareholders' one vote.

These structures make it possible for management or founders to keep an iron grip on the company while putting up less than a majority of the equity, critics of dual-class shares say.

Magnafounder and chairman Frank Stronach, for example, ultimately controls 74 per cent of the vote for the price of less than 1 per cent of the equity.

And the Shaw family of Shaw Communications Inc. controls the company by holding the majority of the class B shares, the only ones that carry a vote.

Magna chief financial officer, Vince Galifi, defended the practice, saying it ensures the stability underlying the company's success.

Magna's business philosophy is to allow its separate units to operate with a great deal of autonomy, he explained. And managers in charge of the separate units have the security to do so because they do not have to be concerned about a change in power at the top.

"The multiple voting shares is really the single largest factor in our historical success."

Shaw Communications CEO Jim Shaw said dual classes of shares allow his company to raise capital in the United States without violating Canada's foreign ownership restrictions on broadcasting companies. "It's a regulation," he said, noting that shareholders opposed to dual classes, such as the Ontario Teachers Pension Plan Board, still hold shares in Shaw.

At FirstService Corp., supervoting shares receive 20 votes. Founder and CEO Jay Hennick said the disproportionate voting power was needed in the company's nascent stages to protect it from possible hostile takeovers.

FirstService is now an established business and property services provider and has less need for the dual-class structure, he said. As a result, he expects his voting control of the company, now 52.5 per cent, to gradually fall as the firm stops issuing supervoting shares and replaces them with single voting stock.

"If we had another offering, [my voting power] would fall below 50 per cent," he said. "They're going to be phased out naturally as we grow." FirstService ranked in the bottom 11 companies with scores of 40 or lower in the ROB study.

David Beatty, a corporate governance expert and a member of the FirstService board, said that is a valid argument for dual-class shares. Founders often have longer-term visions for the company than investors focused on immediate profitability, said Mr. Beatty, a business professor at the University of Toronto. In this case, the shareholders may benefit from dual-class shares.

But other governance experts and some of the country's largest shareholders don't buy these arguments. Many, including Teachers and Ontario Municipal Employees Retirement Board (OMERS), are strenuously opposed to the existence of similar but separate share classes.

"We will not support dual-class share structures," said Brian Gibson, executive vice-president of Teachers. "Our view is if you have one share, you should have one vote."

"We don't like that at all. Not at all," said OMERS CEO Dale Richmond.

Critics argue that dual-class structures serve the owners of the shares with greater voting power, usually by entrenching management and insulating them from shareholder pressure for change.

But it doesn't benefit outside investors at all, they say. Instead, dual-class share structures allow management to make bad decisions with few consequences. It depresses the stock price because other investors -- especially U.S. investors -- are reluctant to back a company with unequal voting rights, thereby raising the cost of capital. And it places the people holding the voting power in a potential conflict of interest with other shareholders, especially if they are able to control the company without holding a big stake in it. There have been small changes to Canada's dual-class landscape recently.

In 2000, Goldcorp Inc. phased out its supervoting and subordinate voting shares as it merged with CSA Management Inc. Goldcorp chairman Robert McEwen said he made the decision to give up his voting control in a bid to woo U.S. investors opposed to the shareholder structure, and increase the liquidity of its shares.

Reached by telephone in London, England, Mr. McEwen said the results have surpassed all expectations.

Trading of Goldcorp shares on the New York Stock Exchange used to make up about 5 per cent of daily volume before dual classes were phased out, he said. Now it makes up more than half of the daily volume, with an average 1.5 million shares changing hands every day, compared with about 1.1 million in Toronto.

He urged other companies with dual classes to consider moving to the one-share, one-vote structure.

"The dual structure is a trap," he said. "It makes you feel you control your destiny but if you are a shareholder with multiple voting shares . . . you find you can't pledge them . . . so you have all this capital tied up and it's not doing anything. Just play by the same rules as everybody else, and you usually have an improvement in the share price."

Critics say Goldcorp's move is the exception rather than the rule. No amount of pressure can force the people with voting control to give up unequal share voting classes if they don't want to, they said. Nevertheless, Mr. Richmond of OMERS sees change on the horizon. "We are putting pressure on companies to end this. I see progress being made in that area."

Teachers' Mr. Gibson said that while change is slow to come, investors opposition has been effective in one way: preventing companies without dual classes of shares from bringing them in.

"It's very, very hard, if not impossible, to suddenly say 'we want to have two classes of shares,' because people just wouldn't support that," said Mr. Gibson, who emphasized that Goldcorp's move was also bad for shareholders because the holders of supervoting shares received a greater proportion of equity in the newly merged company than other shareholders.

OMERS' Mr. Richmond highlighted one major stumbling block to change in Canada. The market here is so small and the practice so widespread that big investors find it hard to avoid dual-class companies without giving up involvement in large junks of the economy, he said.

At Teachers, Mr. Gibson confirmed that the huge pension fund continues to invest in dual-class share companies despite its staunch opposition to the voting inequality.

The rise in dual-class share structures can be traced back to the 1970s when media and telecommunications companies were getting established under the Canadian Radio-television and Telecommunications Commission. Because a limited supply of broadcasting licences were involved, most companies were subject to foreign ownership restrictions. Two classes of shares was one way of raising equity in outside markets while retaining control of the company in Canadian hands. (Many Canadian media and telecommunications companies, including Rogers Communications Inc., Shaw Communications Inc., Telus Corp., and CanWest Global Communications Inc. have dual-class shares.)

The NYSE has not allowed U.S. companies to introduce dual-class shares since 1994.

William Dimma, a corporate director and author of Excellence in the Boardroom: Best Practices in Corporate Directorship, agreed that some dual-class structures are worse than others. Mr. Dimma, who chairs the board of Home Capital Group Inc., a company with 5:1 dual-class voting stock, expressed shock when he learned of Magna's 500:1 ratio.

"I had no idea Magna was that dramatic. That's crazy, that has every potential for abuse," he said. "I can see no justification whatsoever for a times-500 vote under any circumstances."