Giving shareholders an equal say

The big news in EU/corporate governance circles in recent days is EU internal market commissioner Charlie McCreevy's decision not to pressure EU companies to adopt one-vote-per-share voting rules. As has been the widespread practice in its pages and elsewhere, the Financial Times characterizes one-vote-per-shares rules as giving "shareholders an equal say." The same thinking underlies the concept of "shareholder democracy" as it is used today. But this is hardly what such rules do.

Here's the text of a letter on this point that I emailed to the Financial Times today. Hope to see it in print!

In your report ("Brussels drops shareholder plan," October 4) and your editorial ("Beating the Retreat," October 5) on EU commissioner Charlie McCreevy's decision to abandon his push for EU companies to adopt one-vote-per-share voting rules, you characterize such rules as giving "all shareholders an equal say." This reflects a fundamental--and unfortunately widespread--misunderstanding of the ways in which shareholder voting rules distribute power.

The only voting rule that gives shareholders an equal say is the Anglo-American common-law practice of giving shareholders only one vote each. One-vote-per-share rules, in contrast, give each share an equal say but concentrate power in the hands of large shareholders. If shareholdings are dispersed, as in the U.S., then power under one-vote, one-share rules tends to end up in the hands of management, especially when shareholders' procedural rights are as severely limited as they are in the U.S.

In practice today, voting rules fall into two broad categories: those that concentrate power in the hands of a minority of shareholders, including not only one-vote-per-share rules but also priority rights and multiple voting rights; and those that, like the spirit of the common-law default, tend to disperse power, such as voting rights ceilings. Portraying the debate as a stark choice between one vote per share rules, on the one hand, and "control enhancing mechanisms," on the other, misses this very important distinction. Multiple voting rights and voting rights ceilings distribute power among shareholders in opposite ways.

Giving "all shareholders an equal say" may be a laudable goal, but that is not what one-share, one-vote rules do.