MSG Team's other articles

12499 Brand Equity & Customer Equity

Brand Equity is defined as value and strength of the Brand that decides its worth whereas Customer Equity is defined in terms of lifetime values of all customers. Brand Equity and Customer Equity have two things in common- Both stress on significance of customer loyalty to the brand. Both stress upon the face that value […]

12295 Ethics in Advertising

Ethics means a set of moral principles which govern a person’s behavior or how the activity is conducted. And advertising means a mode of communication between a seller and a buyer. Thus ethics in advertising means a set of well defined principles which govern the ways of communication taking place between the seller and the […]

9042 E Marketing and Customer Relationship Management – Two sides of the same coin

Whenever one talks of E marketing strategy or plan, they normally include online selling, online promotions and advertising. However this could be a very narrow view or definition as applied to E marketing. Planning for Customer Relationship Management is as important as paying attention to online selling efforts. Let us look at understanding some of […]

13003 Cultural Factors affecting Consumer Behaviour

Consumer behaviour deals with the study of buying behaviour of consumers. Consumer behaviour helps us understand why and why not an individual purchases goods and services from the market. There are several factors which influence the buying decision of consumers, cultural factors being one of the most important factors. What are Cultural Factors ? Cultural […]

11324 Social Media Channel and Tools

Social Media Channels contain thousands of websites, blogs, forums, videos and so on. Individuals have now begun to spend most of their free time online catching up with various conversations and topics of their interest. When one wishes to get the latest update on news, entertainment, movies, music as well as catch up with what […]

Search with tags

  • No tags available.

The long term success of a company depends on the decisions made by its management. The appointment of management is done by the shareholders. However, the problem is that shareholders are considered to be one homogenous group. This is not an accurate reflection of reality. Different kinds of shareholders invest in a company. Some shareholders intend to hold on to the shares for a longer duration of time whereas there are others who would hold on to the shares only for a few days and in some cases just a few minutes.

The rule of law in most countries provides shareholders with equal voting rights no matter how long they hold the shares for. A decade old shareholder has the same rights as a day old shareholder. Proponents who endorse long term right to vote find this unfair. This is because short term shareholders are often speculators. They have nothing to do with the long term interest of the company. Since they have an equal vote, they end up distorting the company’s value creation process.

Case in Point

The French government has introduced differential voting rights in their companies. This means that shareholders who have held the stock for more than 24 months are listed down in what is called, the “loyalty register”. These shareholders have twice as much voting power as an average shareholder. These differential rights are the de facto standard for every company unless they decide to opt out of the process by mentioning it in their articles of association. A similar law is being introduced in Italy as well. Investors all over the world have opposing views regarding this law.

It must also be noted that the shareholders of major companies like the French carmaker Renault have overwhelmingly voted in favor of “one share one vote”. A similar case happened at L’Oreal where more than 95% of the shareholders voted in favor of maintaining the “one share one vote” rule.

Since the issue of loyalty dividends and loyalty shares requires a special majority i.e. 75% vote in Italy, no major Italian company has implemented these rules as of now.

While some believe that this law is a boon for the shareholders, other think it is a bane. In this article, we will understand both these points of view.

Benefits of Differentiated Voting Rights

  • Avoids Hostile Takeovers: Differentiated voting rights make some class of shareholders more important than the others. This will make hostile takeovers almost impossible. Hostile takeovers are done by buying shares on the open market in a short span of time. However, under this law when shareholders change, the voting rights will be halved. Hence, acquisition of 50% of the shares will only provide 25% of the voting rights. Many governments are supporting this law because it would prevent corporate vultures from taking over companies and causing significant unemployment.

  • Encourages Long Term Ownership: Differentiated voting rights encourage long term ownership. They provide a serious incentive for the people not to sell their shares. It also creates a disincentive for the buyers as they do not get equal voting rights. Some countries are even proposing that the older shareholders be given a special rate of dividend to compensate for their loyalty. Long term share ownership is the platform required to build stable companies as the management would not be distracted by obtaining short term results to pacify some stakeholders.

Disadvantages of Differentiated Voting Rights

  • Minority Rights: The problem with differentiated voting rights is that it negatively impacts the minority shareholders. The larger institutional investors tend to hold shares for a longer duration of time. Hence, they are the ones that will get double voting rights. This will further entrench their already significant moats. On the other hand, minority shareholders do not tend to hold on to shares for very long. Since they will have very little say in the running of the company, it is likely that their capital will be exploited and that they will be marginalized as a group.

  • Effects Liquidity: Another major issue with differentiated voting rights is that it affects the liquidity of the stock. Stocks are sold on the basic premise that they are liquid and that there will always be a ready market available in case the investor wants to convert the stock to money. The introduction of these voting rights hampers this process. Newer shareholders will not get an equal vote. Hence, they will be reluctant to buy. Older shareholders would also have a significant reason not to sell. This would create an artificial scarcity of stocks which will hamper the free functioning of the market. Theoretically, there should be zero transaction costs for a market to function freely. The imposition of significant costs will distort the prices and negatively impact liquidity.

To sum it up, differentiated voting rights is a complex issue. There are significant pros and cons to be analyzed in this case. However, the “one share one vote” rule has been entrenched in the corporate culture for very long. Changing this rule will require a lot of influence and will lead to a lot of short term mayhem in the market. Instead of the government making the decision on the company’s behalf, each company can be given the right to decide on its own.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Corporate Governance – An Overview

MSG Team