T. Rowe Price Group says it's troubled by the growing number of public companies with two or more classes of stock that give a few insiders disproportionate voting rights.
In what experts in corporate governance believe is a first by a major money management firm, Baltimore-based T. Rowe is taking a stand against the practice this year.
As it votes on behalf of shareholders in its mutual funds on proxy items at forthcoming corporate annual meetings, it will oppose certain company directors and members of corporate governance committees at companies controlled by insiders via a dual-class stock structure, under a newly adopted policy guiding the voting.
Companies with such structures are increasingly common. They include Google parent Alphabet Inc., Comcast Corp. and Viacom, as well as Silver Spring-based Discovery Communications and Sparks-based McCormick & Co. Inc.
Under Armour, the Baltimore-based athletic apparel brand, has had such a structure concentrating voting power in the hands of its founder and CEO Kevin Plank, but soon will issue a new class of nonvoting stock in a stock split to preserve his control over the company even as he sells shares.
Preserving control for founders is often cited as the reason for creating such multi-class stock structures as companies grow and the founders' ownership or voting power becomes diluted. Plank called it a "founder-led approach." But that leaves shareholders with unequal voting rights, say critics, who see such structures as founders seeking access to the capital of a public company while keeping the control of a private company.
"We believe this structure is problematic and not in the best interest of our fund shareholders," said Bill Benintende, a T. Rowe spokesman. "The message we are trying to send is that the best governance structure is one in which controlling stockholders share the same link between economic risk and control as other stockholders."
Voting against a lead independent director or independent chairs and all members of a company's nominating and corporate governance committees, he said, "is how we have chosen to express our view."
As more companies come out with such structures in their initial public offerings, institutional investors are beginning to question or take action against some forms of dual-class structure, said Patrick McGurn, special counsel for Institutional Shareholder Services, a Rockville-based firm that works with a broad range of institutional investment clients.
Nearly 7 percent of large-cap S&P 500 firms have dual- or multiple-class voting structures in place, according to ISS' QuickScore database. And unequal voting rights structures are more common at smaller firms. For Russell 3000 index firms, excluding the S&P 500 companies, dual- or multiple-class voting structures rises to 8.8 percent, the ISS database shows.
Dual-class structures have been adopted by technology companies in about a quarter of initial public offerings in the past 12 months, McGurn said.
"While T. Rowe has taken a very public and aggressive stance on this topic, they're the bellwether investor at this point," McGurn said. "Others are looking at the issues or have taken a different approach. T. Rowe has taken the lead of the pack at this point."
Activist shareholders who challenged such structures in the past were viewed as not having much of a chance at success, but "that's changing," McGurn said.
Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, has long argued that dual-class stock is a problem for investors because it makes it harder for investors to hold insiders accountable.
Donna Anderson, T. Rowe's head of corporate governance, spoke about the new policy last week during a corporate governance conference at the center, Elson said.
"This is the first time I'm aware that a major investor has taken an appropriate stand," he said. "I'm delighted they're doing it. They're taking a principled and appropriate stand opposing the use of the dual-class stock. It's the right thing to do for their investors and investors in general. … There's no good reason for that structure."
Elson believes such policies eventually could have an impact and influence controlling shareholders to remove dual-class structures.
"This is the start," he said.
T. Rowe has adopted the policy even as, across the Inner Harbor, Under Armour prepares to complete a stock split that would give each of its shareholders a share of a new nonvoting stock for each share of common stock they own, further diluting their voting rights, while preserving Plank's control.
The company already operates under a dual-tier stock structure in which Plank owns most of the Class B shares, which have 10 times the voting rights of Class A shares.
At the meeting last August at which shareholders approved the unusual new split, Plank argued it maintained what he called his "founder-led approach" to corporate governance that has resulted in soaring sales, profits and stock value for a decade at the company.
Under the new plan, should Plank's ownership dip below 15 percent, all his Class B shares would convert to Class A shares, effectively ending Under Armour's unequal voting structure. But that could be years from now. Plank owns 15.9 percent of the company's outstanding stock but controls 65.3 percent of the voting shares, according to the company's latest proxy statement.
Asked whether T. Rowe's new policy will mean opposing Under Armour directors, Benintende said the policy reflects the firm's point of view, but "as a matter of course, we don't disclose in advance how we plan to conduct our proxy voting."
The money management firm's stance shows it's taking its voting seriously on behalf of the shareholders whose money it is investing, said Kathleen Day, a professor at the Johns Hopkins University's Carey School of Business.
Day, who is writing a book about 100 years of financial scandals and corporate governance issues, believes fund managers often have had an inherent conflict of interest when they vote on behalf of shareholders, while their firms may want to solicit business from the company, such as retirement fund management.
"It's good that they're stepping up to the plate and taking the proxy voting responsibility seriously," she said. "The law requires them to do that."
The use of dual-class stock structures by large tech companies has spurred a growing movement of small tech startups implementing the structure, said Ryan Roberts, a partner at Dallas-based Roberts Foster LLP who represents high-growth companies and venture capitalists and is founder of the "Startup Lawyer" blog. Roberts said about 15 of every 50 startup founders now ask about the structure, compared to about one of every 50 some years back.
"They're trying to emulate what successful companies have done," Roberts said.
"Generally, founders put their blood, sweat and tears into their startup and the thought of losing control is extremely frightening and this structure gives them comfort," he said in a recent blog post in which he discussed pros and cons of such systems.
For smaller companies, "it is initially cumbersome and expensive," he said in an interview. "It can be awkward to let other employees know that they have reduced voting rights."
It tells employees compensated in stock that while they are valued to a point, they shouldn't have a say in how the company is run, Roberts said. It also makes it difficult for shareholders to hold certain insiders accountable, he said.
"Obviously, it's a pro if you are a founder and you get this accepted. … You get disproportionate voting control over the company," Roberts said.
"If you're doing well, people aren't going to complain about that."