Two-Tier Share-Voting Plan is Half-Baked

Last Updated Aug 4, 2009 4:30 AM EDT

All equity should be equal, according to Lord Myners, the former fund manager. The minister thinks committed shareholders should have more votes than short-term investors.

Presumably he would want proof rather than a promise that shareholders are there for the long term, so his policy would effectively disenfranchise new investors until they had been on the register for the qualifying period. His opposition to ownerless companies would create assetless portfolios.

Just as two-tier voting structures have finally been abolished from the corporate sector, the Treasury minister would be re-introducing them -- or perhaps creating a multiple-voting structure in which new buyers have no votes but investors who have held for a decade have even more votes than those who bought five years ago.

The principle of one share one vote would be ripped up and equity would no longer be equity. Maybe investors could be given loyalty cards that collect extra votes like airmiles?

It is easy to attack the detail of Lord Myners' proposal, revealed in a BBC interview. Would the investor buying a substantial stake in a dawn-raid have to wait to vote its shares -- and could the company use that delay to devise a poison-pill defence, knowing its new investor could not vote against? Might disenfranchising new investors give minority investors the majority of the votable-shares? Would equity received in rights issues or scrip dividends fail the time test? And what of the complexity for an institution that acquired shares at different dates?

But to debate the detail is to miss the big point. Differential voting is bad in principle. It rewards passive investors, including index funds, that do not deal and penalises those that adjust their portfolios to maximise returns for the ultimate beneficiaries.

Lord Myners' idea (it doesn't deserve to be called a plan) confuses active shareholders with activist shareholders. It assumes discontented investors should engage with directors rather than sell their shares (though selling automatically disenfranchises an investor: these proposals punish buyers of shares). But if new investors cannot vote, why would directors bother to talk to them?

Chairman and chief executives have a lot to worry about from the minister's proposal. We have already seen management of companies pass from the executives to the non-executives; this policy would pass the power out of the boardroom to shareholders -- but only those who have served their time. How long before the decision-taking is delegated from the institutions to the pension members and life policy holders for whom the shares are held?

Managers must be allowed to manage and shareholders should be allowed to buy or sell freely, without jeopardising their voting power, and be free to use their votes to endorse or oppose management. There is no such thing as a long-term shareholder: even investors who have been there since incorporation could sell out tomorrow.

As a peer, Lord Myners is an unelected minister, but would he extend this principle of two-tier voting to parliamentary elections too? I suspect not.

(Pic: Robert Scarth cc2.0)