- Ma Carla Mapalo
Tenure-Based Voting: Is it Worth Trying?
Short-termism is currently a corporate governance concern. Data provides that the average holding period of public companies has been declining—from three to five years in 1960 to 1980 to around seventeen weeks in 2015. Some scholars suggest that the rise in short-term ownership may be linked to the increase in ownership of public companies by institutional investors. Most of these companies, especially the actively managed institutional investors, are believed to be “short-term speculators rather than committed long-term investors.” They are supposedly pressured to pursue short-term corporate actions to readily obtain profit at the expense of long-term investment and growth.
The changes in the market and attitude of investors led people to propose alternative voting regimes to resolve what is perceived as opportunistic behaviors of corporate actors that are detrimental to the corporations and the society. Although the “one share, one vote” system remains to be widely accepted as the best corporate governance practice, some proponents are advocating for a tenure-based voting scheme to address the perceived short-termism in today’s market.
Tenure-Based Voting as a Corporate Governance Solution
Tenure-based voting, also known as time-phased voting, is defined as an alternative capital structure whereby “shares accrue greater voting power overtime if held by the same holder.” Simply stated, it is a voting scheme wherein the “investor voting rights increase with the length of time that they hold the shares.”
Proponents believe that it curbs short-termism by decreasing the influence of short-term shareholders and rewarding long-term shareholders, who are most likely committed to sustainable growth and development of the company, with more voting power. They argue that it protects managers from market pressures and allows them to focus on long-term goals. As aptly explained by legal scholars, this voting arrangement “will encourage more shareholders to take long-term views of their investments and will empower long-term shareholders relative to their short-term counterparts. This shift in power should make managers relatively more responsive to long-term shareholders' interests and relatively less responsive to short-term shareholders' interests, thereby reducing myopic behavior.”
Status in the US and Other Jurisdictions
While a tenure-based voting scheme is gaining prominence as a proposed remedy to corporate myopia, there are only a few US companies which have adopted this arrangement. A study identified only a dozen U.S. corporations to have implemented a time-phased voting structure. These companies were found to have outperformed the market, but because of the small sample size, the study concluded that their performance cannot be indicative of the positive effect of tenure voting on stock performance.
The current exchange regulations may have deterred US public companies from adopting the tenure-based voting scheme. The SEC previously enacted Rule 19c-4, which prohibited disparate voting rights. Although this rule was overturned by the court two years after its enactment, the SEC supposedly urged the exchanges to amend their own listing standards to prohibit disparate voting standards. The exchanges complied and implemented a uniform voting policy, which expressly prohibited “time-phased voting plans.” Some have interpreted this provision to constitute a prohibition on tenure-based voting schemes in publicly-listed companies.
Tenure-based voting also exists in other jurisdictions, such as Italy, France, and the Netherlands. Notably, in 2014, France enacted the Florange Act, which made tenure-based voting the default regime. The law “automatically grants double-voting rights to any shares held in a registered form by the same shareholder for at least two years, provided that the company does not prohibit double-voting rights in its bylaws.” The law, reportedly, was passed to encourage long-term financial investment, reduce turnover in shares, and allows companies to be managed with a long-term view. Prior to its enactment, listed corporations were allowed to amend their by-laws to grant double voting rights to long-term shareholders.
Arguments against its Adoption
Although there are proponents calling for the adoption of tenure-based voting schemes, several scholars raise various concerns regarding its implementation. Some believe that it entrenches corporate insiders, such as managers and founding families, to the detriment of the outside shareholders. They argue that it can negatively impact the value of shares because the market discounts shares which do not offer proportionate voting rights and the risk of controlling shareholders extracting private benefits. Moreover, because of the operational and administrative complexities in its administration, it is expensive and administratively burdensome to administer and may lead to confusion over distributions of voting power that makes it less attractive to investors.
These concerns seem to have been validated by a study which examined the consequences of the implementation of the Florange Act. The research analyzed French companies and their performance after the enactment of the law. The research has three main findings—first, firms that adopted tenure-based voting experienced a decrease in long-term foreign institutional ownership; second, these firms significantly underperformed in terms of stock returns relative to those companies which did not adopt a tenure-based voting scheme; and third, their environmental and social performance deteriorated. The study concluded that the results raise doubts about the merits of tenure-based voting as a desirable corporate governance mechanism and affirm the concerns that it reinforces insider entrenchment.
Based on the foregoing, it remains to be seen whether a tenure-based voting scheme is a proper remedy to cure short-termism, which has plagued the US public market. Aside from assessing the impact of this voting mechanism, a corporation contemplating its adoption needs to consider several operational aspects, including the length of holding period, the number of votes to be awarded to each holding period, the rate of increases in the votes, and tracking ownership. Although there are good reasons for its adoption, it is unclear if it can do more harm than good in view of the complexity of its implementation.
Ma. Carla Mapalo serves as a Graduate Editor of the NYU Journal of Law & Business. She is pursuing an L.L.M. in Corporation Law at the New York University School of Law as a Dean’s Graduate Scholar. Prior to attending NYU, she worked as a senior associate of the corporate and commercial department of a top tier law firm in the Philippines, where she specialized in mergers and acquisitions, antitrust, and project finance.