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Dual-class voting structure under microscope

A dual voting structure might suit a number of Canada's tightly controlled public companies, but many view it as unfair and favour a U.S.-style one-share, one-vote system.

An estimated 80 per cent of all companies in the United States are widely held by shareholders, while only 20 per cent are in Canada, says David Nitkin, president of EthicScan, a corporate responsibility research house and consulting firm based in ........

"So for a lot of Canadian companies, you have a majority shareholder, whether a family or a privately held organization," which controls the company typically through dual class voting shares, he says.

Dual class shares create different classes of shareholders with different rights, and are something Jeffrey Gandz calls "really unpleasant stuff."

"Folks in the States have one share, one vote," says Prof. Gandz, who teaches business at the Richard Ivey School of Business at the University of Western Ontario. In Canada, "some classes of shares have multiple voting rights. They were designed to allow companies to raise money without the owners losing any control.

"And frankly, as a common stockholder, you're totally and completely at the mercy of the people who own the voting shares."

The Four Seasons hotel chain, Canadian Tire and Bombardier are all companies with a dual-class voting structure, says Prof. Gandz. The structure creates a separation between those who put up the money and take the risk, and those who don't own much of the company but have the votes and therefore the control.

That kind of share structure is not liked in the United States, he says.

"It makes the Canadian capital market, which is already viewed somewhat sceptically by other people, probably viewed even more sceptically if you don't follow the [U.S.] legislation."

Prof. Gandz predicts that Canadian capital markets will have to harmonize with the U.S. market eventually. Because there are many small Canadian companies for which the Sarbanes-Oxley Act, passed in the U.S. last summer, "would be overkill," he suggests that two levels of regulations for Canadian companies may develop, with the large companies ultimately aligning themselves with the U.S. capital markets.

Institutional shareholders also favour a more equitable voting structure.

"We would prefer the one-share, one vote arrangement," says John MacNaughton, president and CEO of the Canada Pension Plan Investment Board, "just because that's shareholder democracy." In fact, the CPP board indicated this in its proxy voting guidelines released in February.

"One share, one vote is a pretty solid principle: my dollar is as good as your dollar, so I should have an equal say," agrees Tom Gunn, chief investment officer for the Ontario Municipal Employees Retirement System and chairman of the Pension Investment Association of Canada. Mr. Gunn says he doesn't consider dual class shares "intrinsically bad," but notes the potential for abuse.

© The Globe and Mail

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