Shareholder democracy is evolving. Three dynamics are at play: unequal voting rights structures, new opportunities to vote on climate-related issues and the rollout of “pass-through” voting solutions by asset managers, offering increased flexibility to their clients on the voting of their shares. FTI Consulting’s Arnaud Cavé explores these trends in the United States and Europe and provides actionable insights for boards aiming to enhance investor relationships and maximize shareholder support at annual general meetings.
How should voting power be distributed among shareholders? What should they be asked (or be entitled) to vote on? And should asset owners vote their shares themselves or let asset managers handle it?
The rise of capital structures with unequal voting rights
The principle that each share should carry the same number of votes (“one share, one vote”), aligns shareholders’ economic and voting interests and is a central tenet of good governance. However, the successes of U.S. technology companies with dual-class stock (i.e. capital structures with two classes of shares, including a high-vote class often reserved to founders and a low-vote class offered to the public) in the past two decades has led to an increase in the number of initial public offerings (IPOs) with dual-class stock, challenging the merits of the one share, one vote principle.
Proponents of dual-class structures often argue that they are necessary to allow founders to successfully implement their long-term vision without being impacted by short-term market pressures. Opponents stress that such structures disenfranchise minority shareholders, who are often left with little means to hold the company’s board and leadership accountable for their performance.
Regional trends across the U.S. and Europe
According to data from Jay Ritter’s website, the proportion of U.S. IPOs carried out with dual-class stock reached 26.7%, on average, in the past five years (2019-23), representing a significant increase compared to the 17.1% average recorded in the previous five-year period. Dual-class shares are also used in Europe and notably in Sweden, where they’ve been part of the landscape for a century and currently represent 70% of the main market’s capitalization.
Another European market known for its widespread adoption of capital structures with unequal voting rights is France, where more than two-thirds of companies have implemented loyalty voting shares. This ownership structure allows shareholders who register their shares for a specified period (generally two years) to acquire enhanced voting rights (generally two votes per registered share). In the past 10 years, similar structures have been introduced in other European markets, including Belgium, Spain and Italy. This system may appear more democratic than the dual-class one, as any shareholder can register shares to obtain enhanced voting rights. Yet, most institutional investors consider the registration process overly burdensome, meaning that the system mainly benefits founders and other strategic shareholders.
Considering the success of their U.S. counterparts in attracting high-profile IPOs, European markets have been looking at solutions to improve their competitiveness. In December 2022, the European Commission unveiled a set of initiatives aimed at making EU capital markets more attractive, including a proposal for a directive requiring all EU member states to allow multiple-vote share structures for companies seeking admission to trading on a small and medium-sized enterprise (SME) growth market. One year later, the UK’s Financial Conduct Authority (FCA) also proposed new listing rules removing certain investor protections available under its current regime for dual-class share structures.
Investor views on minimum safeguards
While various capital markets may limit the number of mandatory safeguards on shareholder voting rights to increase their attractiveness, companies that implement some of these measures on a voluntary basis are generally viewed more positively by investors.
In June 2022, British railways pension scheme Railpen and the U.S. nonprofit Council of Institutional Investors (CII) launched the Investor Coalition for Equal Votes (ICEV). Considering the risks of capital structures with unequal voting rights, as well as some of the benefits for early-stage companies, ICEV encourages companies entering financial markets to adopt a one share, one vote structure, or at least to adopt sunset provisions, triggering a return to a one share, one vote structure after a defined period following the IPO.
Echoing similar concerns, the European Fund and Asset Management Association (EFAMA) published a position paper commenting on the proposed EU directive on multiple-vote share structures, calling for the introduction of adequate safeguards, including:
- Mandatory sunset clauses (of at most seven years).
- Maximum voting ratios (the ratio of the votes attached to shares of the high-vote class vs. those of the low-vote class), with a preferred maximum of 5:1.
- Restrictions on the resolutions on which the enhanced votes can be used. For example, enhanced voting rights should not be used on matters relating to compensation, dividends or for the approval of related party transactions.
- The appointment of an adequate number of independent directors on the board.
Increasing opportunities to vote on companies’ climate strategies
Just as important as the question of the distribution of power among shareholders is the one concerning what topics they should be able to vote on.
Over the past three years, shareholders have had the opportunity to vote on an increasing number of climate-related proposals. Shareholder proposals, most popular in the U.S., have asked companies to report on the opportunities and risks associated with climate change, greenhouse gas (GHG) reduction targets and transition plans. Meanwhile, Europe has seen the emergence of management-sponsored votes on climate transition plans (say-on-climate proposals).
Investors are, however, divided on the benefits of these votes. Some believe in the benefit of providing shareholders with the opportunity to express their perspective, while others believe that oversight of climate strategy should remain a prerogative of the board, only.
U.S. and European dynamics
According to data from the French SIF, there were 85 climate-related shareholder proposals tabled at U.S. companies’ AGMs in 2023, representing a third consecutive increase in the number of proposals (2022: 67; 2021: 33; 2020: 24). This number more than tripled in the U.S. between 2020 and 2023, while over the same period the shareholder support for these proposals halved. This is linked to the SEC’s decision in 2022 to allow more prescriptive proposals to reach the ballot. Shareholders have likely been more reluctant to support the more prescriptive proposals, and some of them might also have been influenced by certain political pressures against ESG in the U.S.
Europe has not seen a similar rise in shareholder proposals. However, Europe saw the emergence of management-sponsored say-on-climate proposals, which have remained rare in the U.S. 22 management-sponsored say-on-climate proposals were included in European AGM agendas in 2023 (2022: 37; 2021: 20; 2020: 1). The lower number of proposals tabled in 2023 compared to 2022 may reflect a number of factors. First, a number of shareholders are now taking a more sophisticated approach to the analysis of these proposals, and companies generally prefer to avoid the risk of receiving dissent on their proposals. Second, a number of the proposals previously tabled had a triennial nature. Lastly, several shareholders have stated that they did not wish to opine on such proposals.
Investor perspectives on climate votes
One notable investor in favor of companies considering such proposals is Amundi, the largest European asset manager. Amundi “encourages issuers to hold an advisory vote at the AGM on the company’s climate strategy at the minimum every three years, as well as an annual vote on the ex-post implementation of this strategy.” When presented with such votes, Amundi expects companies to have disclosed “comprehensive targets,” “a precise agenda” and “clear resources to achieve their climate goals,” enabling the asset manager to assess the “soundness” of the company’s strategy and “its alignment with the Paris Agreement.”
However, other notable investors, as well as PRI, the leading proponent of responsible investment, are not in favor of voting on climate transition plans. PRI considers that the benefits of say-on-climate votes as a mechanism to encourage climate action are outweighed by risks and potential unintended consequences, including:
- Companies proposing unambitious transition plans.
- Investors approving plans that are inadequate to limit global warming to 1.5°C.
- Companies losing the flexibility to raise their climate ambitions beyond the scope of the approved plan.
- Investors losing influence in company engagements after a plan is approved.
- Investors shifting their attention and resources away from more focused stewardship actions.
Given the different opinions in the market, if a company has flexibility in deciding whether to put a say-on-climate proposal to a vote, there may be benefit in surveying existing shareholders regarding their appetite for such a vote before moving forward.
However, independent of whether a company intends to put its climate strategy to a vote, it is becoming increasingly important to develop strong climate strategies, supported by efficient governance structures and to clearly communicate these to all relevant stakeholders.
Asset managers are providing voting choices to their clients
Asset managers typically manage money for a large number of asset owners, whose views about climate and ESG may diverge, in particular in the U.S. Against this backdrop, several asset managers, including the Big 3 (BlackRock, Vanguard and State Street), have started implementing pass-through voting solutions, enabling their clients to vote either following the asset manager’s approach or using different guidelines. This change in voting dynamics presents new challenges for companies relying on engagement to maximize shareholder support at their AGMs.
Options for asset owners
The asset managers that have rolled out pass-through voting solutions have generally provided one or more of the following options to their clients:
- They can follow the asset manager’s approach.
- They can implement their own guidelines.
- They can select from a set of voting policies developed by proxy advisers (agencies that provide voting recommendations to institutional investors).
For example, BlackRock, the world’s largest asset manager, lets its clients choose from 14 policies developed by leading proxy advisory firms ISS and Glass Lewis. Interestingly, one of these policies will just align clients’ votes with board recommendations, while others will have a stronger focus on climate and sustainability or seek to align votes with clients’ religious beliefs.
Re-thinking shareholder engagement and corporate reporting
Pass-through voting solutions reduce the influence of major asset managers and empower asset owners by offering them more options to align their votes with their own convictions.
However, some asset owners might not have the same voting and engagement capabilities as large asset managers, who often have large teams of experienced analysts who can evaluate lots of company reports and AGM resolutions, and accommodate engagements with companies.
For companies, the deployment of pass-through voting solutions means that previous engagement strategies may no longer have the same impact on the outcome of shareholder votes. Companies seeking to maximize shareholder support at AGMs may consider expanding their engagement strategies to reach certain key asset owners.
In addition, with the possible decrease in influence of large asset managers, companies will need to put additional emphasis on corporate reporting. Company disclosures will be closely examined by asset owners and proxy advisors, whose influence could grow due to these new changes in voting dynamics.
Conclusion
Shareholder democracy continues to evolve and these changes create new challenges for companies. Private companies considering an IPO with unequal voting rights, or public companies that already have such structures, can implement certain protections for investors to increase the attractiveness of their shares.
Offering a vote on the company’s climate strategy on a voluntary basis is not always desirable. Given diverging opinions in the market, it is important to consider the appetite of your main shareholders for such a vote before finalizing the AGM agenda. However, developing strong climate and ESG strategies, supported by robust governance structures, should be viewed positively by a majority of institutional investors and help mitigate the risk of ESG activism.
Considering the rollout of pass-through voting solutions by asset managers, companies seeking to maximize shareholder support at AGMs may need to review their engagement strategies and place further emphasis on corporate reporting, clearly outlining how board decisions align with the long-interests of shareholders.
Arnaud Cavé is a director in FTI Consulting’s governance and ESG practice and is based in Dublin. His role involves advising large public and private companies in the EMEA region on matters ranging from securing shareholder support on executive compensation and M&A transactions to the development of tailored governance frameworks supporting companies’ commercial and ESG objectives. 
