One Share, Many Votes

With two classes of stock, the usual tools for keeping management in line are dulled

It may be the best deal in Corporate America: own a tiny piece of a company's stock but control most of the voting power. Corporate-governance types hate it, but the setup is making a comeback. Insiders, usually the founders, get stock with extra votes while others get second-class shares with fewer votes. "It's a crummy business structure," argues activist Sarah B. Teslik, executive director of the Council of Institutional Investors. "Minority shareholders don't have the ability to protect themselves."

Media company Comcast Corp.'s (CMCSK ) all-stock bid for Walt Disney Co. (DIS ) has brought the issue to the boil. Comcast CEO Brian L. Roberts owns superstock that represents just 0.4% of outstanding shares yet guarantees him a third of the votes. Critics fret that exchanging Disney CEO Michael D. Eisner for Roberts would be swapping one overly powerful chief for another. Says Kevin J. Cameron, president of institutional proxy advisory firm Glass, Lewis & Co: "Why do I want to go from being a peasant to being a serf?"

Academics figure 10% or more of all listed companies have at least two classes of stock, perhaps twice as many as in the 1980s. Washington-based Investor Responsibility Research Center says 11.3% of the nearly 2,000 companies it now tracks have multiple classes, up from 7.5% in 1990. Corporate spin-offs and initial public offerings are pumping up the numbers. In 2002, no less than 16.5% of IPOs had at least two classes of stock -- double the average of just under 8% a year in the 1990s, says University of Florida finance professor Jay R. Ritter.


Shareholder advocates slam the practice as undemocratic. Instead of giving all shareholders voting clout commensurate with the capital they have at risk, a dual-share listing gives privileged stockholders a lion's share of votes. In one extreme case, brewer Adolph Coors Co.'s (RKY ) B-shares, owned by the public, have no votes except in the case of a merger; A-shares held by the family trust have all the votes on other issues. "It's the worst of both worlds from a shareholder perspective," says Nell Minow, editor of research firm the Corporate Library LLC.

A rash of new companies has been aping the older outfits lately. Martha Stewart Living Omnimedia Inc. (MSO ), for instance, went public in 1999 with supervoting stock controlled by former Chief Executive Martha Stewart, assuring that any directors she backs will win. Likewise, when the Chicago Mercantile Exchange went public in 2002, the traders who owned it created special stock giving them an outsize voice in electing directors. So did the five airlines that took Internet travel booker Orbitz Inc. (ORBZ ) public in December.

Corporate critics say that with few restraints, management can spin out of control. They point to cases such as Hollinger International Inc. (HLR ), the owner of the Chicago Sun-Times and London's Telegraph Group Ltd. newspapers, where independent directors accused former CEO Conrad M. Black of enriching himself improperly. Black, who denies the charge, is enmeshed in court battles because he tried to sell his controlling block of supervoting stock after promising not to. The independent directors, who want to sell the entire company so all stockholders can benefit, recently prevailed in a Delaware court.

Despite such concerns, many investors are willing to be disenfranchised -- as long as the stock performs well. "To dump on a company just because it has two classes of stock is simplistic," argues Linda R. Killian, a portfolio manager at IPO Plus Aftermarket Fund in Greenwich, Conn. She has invested in Dick's Sporting Goods Inc. (DKS ), a national retailer taken public by the founding Stack family in late 2002. CEO Edward W. Stack has 10 votes per share to outsiders' one. The stock has soared from $12 at its IPO to around $55 now. In other cases, big investors such as pension funds can't afford to shun stalwarts such as Ford Motor Co. (F ), where the family has 3.9% of the stock but 40% of the votes.


Defenders say the practice shields family managers from Wall Street's obsession with short-term results and guarantees a core of loyal shareholders in lean times. At Dick's Sporting Goods, says Chief Financial Officer Michael F. Hines, "decisions are made for the long-term health of the business."

Proponents also point to the media business, where editorial independence needs to be protected. That's how New York Times Co. (NYT ) and Dow Jones & Co. (DJ ), among others, justify supervoting stock. Says Minow: "No newspaper without a dual class of stock has ever been truly world-class." Yet, some big publishers such as Tribune Co., owner of the Los Angeles Times and Chicago Tribune, manage without.

Still, backers argue that investors know what they're getting with dual-class companies. "If you approve of the way the company is managed and run, you buy shares in the company, and if you don't, you sell them," says Laura Sankey, a Coors spokeswoman.

Despite the new popularity of supervoting shares, some managers don't want them. At radio giant Clear Channel Communications Inc. (CCU ), the founding Mays family has stuck to one share, one vote. Says President Mark P. Mays, whose family owns about 6.5% of the stock: "If we're not doing a good job running the company, then [shareholders] ought to kick our butts right out on the street." Managers who are tempted to hide behind supervoting stock, please take note.

By Joseph Weber in Chicago

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