Shareholders may not want to be subordinate Control freaks

Annual meeting season has seen some of its usual theatrics and high jinks this year, but one theme has popped up in several places: shareholders, especially large ones, are tired of capital structures that entrench management control through multiple-voting shares.

Consider auto-parts manufacturer Magna International (you may not know them, but if you own a North American or European car, you quite likely sit on Magna seats or yank a Magna door handle). Chairman Frank Stronach got up at Magna’s annual meeting and told shareholders he was worth more than the $58 million he made last year as non-executive chairman and consultant to the company. (That’s correct: he does not hold an executive position at Magna but billed the corporation $31.5 million in consulting fees.)

Stronach’s speech was a response to pre-meeting criticism of his pay package by shareholders, including the large Ontario Teachers’ Pension Plan. The Pension Plan stayed home, and refused to vote its Magna shareholding for the board.

Much good it did them: the fund’s 1.7 million Class A shares carry one vote each. Class B shares — of which just over 700,000, or 66%, are owned by Stronach’s family trust — carry 500 votes each. (Those two zeroes are right: we checked.)

You could also consider the example of Onex, the anything-and-everything conglomerate of Canadian industry. At the company’s annual meeting in Toronto in early May, shareholder Robert Verdun — a regular at annual meetings, who has gained some reputation as a corporate-governance gadfly — criticized chief executive Gerald Schwartz for electing his wife, Heather Reisman, to the Onex board.

Were it not for the family relationship, Reisman, who heads retailer Indigo Books & Music, would be seen as a well-qualified independent director; but the marital tie makes her the ultimate insider. It’s hard to see her as an independent director at all, yet Schwartz’s dismissal of the issue (as reported in the daily press) suggests he thinks of it as business-as-usual.

Well, it is his company, after all. And that’s part of the problem: Onex is controlled by Schwartz’s personal holding company, which owns all the company’s non-trading, multiple-voting shares. These are guaranteed a 60% weighting in any shareholder vote (with the exception of some measures on which only the publicly traded subordinate voting shares can be voted).

It can be argued from one side of the issue that the founders and visionaries that build large companies out of personal businesses — as Stronach and Schwartz have done — have a fair interest in keeping management control when the companies are big and publicly traded. It can even be argued that people go into business to make themselves and their families, not their business associates, rich.

Even so, they are doing it with other peoples’ money. From that, it follows that those other people have just as fair an interest in seeing their capital managed transparently.

Shareholders in Onex and Magna have reason to be grateful to management. A dollar invested in Onex at the beginning of 1988 would be worth $5.60 today; a dollar invested in Magna’s B-series then, $3.60 now. That’s better than the $2.25 or so you’d have with that dollar in the broad market.

On the other hand, whatever Frank Stronach may say to the contrary, it is hard to believe that investors have signed up to a covenant in which they permanently give up control over the board in exchange for exceptional returns. Institutional shareholders, especially, are flexing their muscles on corporate governance: corporate boards may find it less damaging to let them vote with their shares than to have them vote with their feet.

We can note with some satisfaction — as we often do, complacent pundits that we are — that the mining industry doesn’t have a comparable share-class culture. The two significant examples of it are Sherritt International, where Ian Delaney owns multiple voting shares that permit him to elect a majority of the directors, and Teck Cominco, controlled by management through the tightly held A series of shares, which confer 100 votes each. Like Onex and Magna, both are well-managed companies whose shareholders have done well from management’s efforts, and whose controlling shareholders took on considerable equity risk at the early stages.

But it is hard to shake the feeling that this kind of share structure is not something institutional shareholders will accept much longer. Goldcorp may have been recognizing that reality when it reorganized its capital structure and eliminated multiple-class shareholdings in 2000. Well-managed mining companies can anticipate that trend, and may be wise to plan for the day when one share is always one vote.