Corporate Governance/Shareholders’ Rights

According to Wikipedia, corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed.  Governance structures are intended to identify the distribution of rights and responsibilities among different stakeholders, including; boards of directors, management, employees, shareholders, creditors, auditors, regulators and others.

Interest in the corporate governance practices of modern corporations, particularly in relation to accountability, increased following high-profile collapses of a number of large corporations during 2001-2002 and again after the recent financial crisis in 2008.

Investors’ primary concerns relating to corporate governance tend to fall in the area of shareholder rights.  Organizations should respect the rights of shareholders and help shareholders to exercise those rights.  They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings and exercise their voting rights, in person or by proxy.

Historically, the vast majority of public corporations have a good record with respect to shareholders’ rights.  In addition, continuing and improving regard for shareholders is being nudged forward by the SEC and activist investors.

However, there are still a number of corporations that persist in the belief that founders and management (often the same) are the best judges of what is in the shareholders’ interest.  To that end, some corporations have created a wide range of strategies to limit or otherwise reduce public shareholders’ rights.  These include; two or more unequal classes of stock, staggered boards, super majority voting, cumulative voting and boards dominated by insiders.

Push back from activist investors and increased regulatory efforts have been moderately effective, and more corporations have made changes that give shareholders a stronger voice in corporate governance.

But now we have Snap, Inc.  Following the recent IPO, it has become apparent that Snap public shareholders will have no voting rights and may also be excluded from information such as executive pay and other corporate governance matters.  With Snap, the question becomes: since there are no common shareholders’  votes, what does that do to the level of disclosures in advance of annual meetings?

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®