Voting Rights
Thetime-honoredwayforprotectingincumbentmanagement
is to issue shares with different voting rights. In its most
extremeform,theincumbentmanagersholdalloftheshares
with voting rights and issue only nonvotingshares to the
public.Thisistheruleratherthantheexceptioninmuchof
Latin America and Europe,
20 wherecompaniesroutinelyissuenonvotingsharestothe
public and withhold voting shares for the controlling
stockholdersandmanagers.Ineffect,thisallowstheinsiders
inthesefirmstocontroltheirdestinywithasmallpercentage
of all outstanding stock. More generally, firms can
accomplish the same objective by issuing shares with
different voting rights.
Tocompensateforthelackofvotingrights,manycompanies
eitherpayhigherdividendsonnonvotingsharesorgivethem
a prior claim on cash flows. This does complicate the
comparisonofpricesontheseshares,sincethevalueofthe
higherdividendsmayoffsetsomeorallofthevaluelostfrom
nothavingvotingrights.Inatwistonthisconcept,thereare
somefirmswhere votingrightsvestonly withshareholders
who have heldstock for more than a specified period of
time—say, three years. This presumably gives long-term
shareholdersa greater say in how companies arerun than
short-termstockholders(whoareviewedasspeculatorsrather
than investors). The net effect, however, is to empower
incumbentmanagersandreducethepowerofstockholders,
both short-term and long-term.
Corporate Holding Structures