Apr 5, 2017
Personal Investor: Dual-class shares and underclass investors
By Dale Jackson
You’ve got to shake your head at Bombardier’s failed attempt to give some executives a big, fat pay raise after getting a billion-dollar bailout from taxpayers and seeing its share price halved since 2015.
How can anyone be that oblivious to the real world?
Part of the answer lies in Canada’s dual-class share structure. Bombardier is just one of the recognizable publicly traded companies that have two sets of shareholders: the overwhelming majority common shareholders and a tight-knit group of founding family members and executives. Other companies with dual-class share structures include Canadian Tire, Alimentation Couche-Tard, Power Financial, Rogers Communications and Shaw Communications.
A dual-class share structure, or super voting shares, gives one class of shareholders multiple votes over the common shareholder – rendering most shareholders virtually powerless.
Like any hierarchy, dual-class shares can be great if you’re at the top. For common shareholders they can be bad or good. On the negative side, a dual-class share system supports nepotism over merit. Is it a coincidence a CEO who is the founder’s kid just happens to be the best person to run the company? If you don’t like the management team, or the direction they are taking the company, there’s little you or the other common shareholders can do aside from selling.
On the plus side, an insider will probably know the business better than common shareholders. Executives who are less accountable to common shareholders can also implement long-term strategies instead of trying to pump up the stock quarter to quarter.
But the biggest advantage to dual-class shares structures is performance. Canadian stocks with dual-class share structures have produced annual returns of 12 per cent over the past 10 years, while single-class shares have advanced seven per cent over the same period.
