Thursday, November 30, 2006

US Equity Market Reforms

The Committee on Capital Markets Regulation today released a lengthy report recommending a series of regulatory and legal reforms and marketplace reforms designed to (as these things always seem to do) enhance American competitiveness. In the shareholder rights section, there's a proposal that exchanges adopt listing requirements that listed firms with staggered boards obtain shareholder approval of poison pills. (Actually, the first recommendation is that "Delaware should do this".)

Why should we expect that exchanges, acting independently, will adopt reforms that incumbent magament believes are inimical to their own interests? If memory serves, the NYSE long had a rule prohibiting the listing of shares in companies with dual-class voting. Then, when a big fish decided that it wanted to have dual-class voting and threatened to list on another exchange, the NYSE relented. (The SEC tried to limit the dual-class structure by adopting a rule 19c-4, lost a case over its authority to adopt the rule, and ultimately persuaded all of the exchanges to adopt a set of rules that nevertheless permit the continued existence of these structures.)

Dual-class voting is the kind of structure that typically leaves public common shareholders at the mercy of a family of founders. The bulk of the voting power rests in the hands of the holders of one class (like the Fords at Ford Motor, the Sulzbergers at the New York Times, the Rigases at Adelphia and the Dolans at Cablevision), while the public shareholders holding a majority of the economic interest have only a minority voting interest. I understand that public shareholders sort-of know what they're getting into when they buy these shares. (It's "sort-of" because the voting structure is fully disclosed, but the prospective business acumen of succeeding generations of Fords, Sulzbergers, Rigases and Dolans is not disclosed. Prescott Bush begat George H.W. begat George W. begat Jenna and Barb, and I rest my case.) But the public also knows what they're getting into with staggered boards, so why is this qualitatively different?