When Bombardier started appealing the federal government to provide cash infusion in late 2015, one of the many questions hanging over the negotiations concerned whether the troubled transportation firm would be compelled to scrap its dual-class share structure. After all, financial aid from the government would, in some ways, serve to enrich the Beaudoin-Bombardier family, which maintains voting control of the company. But when the feds announced a $372-million loan to Bombardier this week, the dual-class structure remained intact.
The desire to maintain multiple voting shares might have something to do with why Bombardier didn’t get the full $1-billion in aid it was originally seeking from the federal government. (CEO Alain Bellemare has instead emphasized the company’s improved fiscal position the past few months, in effect pointing out Bombardier is not quite as needy as it once was.) Nevertheless, Bombardier illustrates everything wrong with multiple voting shares, a concept that makes it possible for intransigent owners to destroy shareholder value while leaving investors no way to push for changes. After years of corporate governance advocates decrying the practice, a new wave of publicly traded companies is embracing dual-class shares.
Some argue the concept is fundamentally unfair. Common shareholders end up shouldering the bulk of the economic risk, but are essentially powerless to influence the direction of the company. In the case of Bombardier, the controlling families hold a 53% voting stake through Class A shares. Each of these shares carry 10 votes, compared to one vote for every common share. The structure gives family members unparalleled influence over the selection of executive management, board members and the strategic direction of the firm. Take Pierre Beaudoin. During his tenure as CEO, he presided over a roughly 70% decline in the company’s share price, not to mention cost overruns and delays with the respect to Bombardier’s C Series program. In 2015, he was elevated to the position of executive chairman. Would that have happened at another company? Doubtful.
But Canadian firms that have gone public in recent years have embraced multiple voting shares. The list includes Spin Master, Cara Operations, Shopify, Stingray Digital, Aritzia, and Freshii, which started trading last month. The case for multiple voting shares is that they allow executives manage for the long-term. They can pursue necessary strategies that might not pay off for years, and not have to worry about pressure from shareholders who only think about the next quarter. (Or worry about hostile takeovers, for that matter.) There is also evidence to show that dual-class companies actually outperform their peers.
Indeed, there are many defenders of the practice. “Dual class shares are a pillar of our industrial structure,” wrote Yvan Allaire last year, executive chair at the Institute for Governance of Private and Public Organizations in Montreal. “That ownership structure should be encouraged, promoted and blessed, provided proper safeguards are in place to protect minority shareholders.” (It’s worth noting Allaire is a former member of Bombardier’s board of directors.)
Still, the rash of multiple voting shares has prompted concern from some who study corporate governance. Anita Anand, a law professor at the University of Toronto, has recommended regulators take a closer look at the use of multiple voting shares. Particularly, common shareholders need to be protected if a company institutes a change of control or collapses its dual-class structure. That could avoid a repeat of Magna’s decision to pay founder Frank Stronach roughly $900 million in 2010 to effectively cede control of the company.
Ultimately, what investors should realize is that buying into a firm with dual-class shares really means making a huge bet on the owners—having full faith that they’ll provide returns, and know when to step back or change course when performance starts to sink. As Bombardier shows, once ownership is entrenched, good luck getting them out.
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