Family control of a publicly traded company is increasingly coming under attack. But the dual classes of stock that allow a family to maintain control without holding a majority stake probably won't disappear anytime soon, financial experts say.
The issue of family control is back in focus following a report that the Ford family was discussing the sale of some of its holdings in the troubled automaker. The family denied the report, though Ford Motor's shares spiked on the news.
According to last week's Detroit News, the Ford family met last month to consider whether to hire a high-profile Wall Street investment firm, Perella Weinberg Partners, to advise the family about its huge holdings in the automaker. The family decided against the move.
This system of dual classes of stock, typically A shares for the public and B shares for the controlling family, was set up specifically to maintain family control of a company by allowing members to out-vote common shareholders. In many cases, a common A share carries one vote and a B share carries 10. The controlling family can use its voting power to thwart the will of common shareholders.
“A/B share ownership allows a minority to move the company in a direction that’s not necessarily in the best interests of shareholders,” says Irv DeGraw, a finance professor at St. Petersburg College in Florida. “But common shareholders can’t object to the voting rights because they accepted the disparity when they bought the stock.”
Not Always an Issue
This isn’t an issue as long as the company is well-run and the stock price reflects a robust performance.
“I don’t think anyone has an issue with family-dominated ownership provided there’s perfect transparency and the family is just as accountable as any other stockholder,” says Wayne Rivers, president of the Family Business Institute a consulting firm in Raleigh, N.C.
At Friday's annual shareholder meeting, however, Ford shareholders again tried to strip the family of its special class of voting stock, reflecting frustration over the family's century-long leadership of the company. Though the resolution failed again, a bigger percentage of shareholders approved the measure than ever before
Ford's not the only company to feel pressure over the dual class of stock. Shares of two media companies, New York Times and DowJones, have languished under family control, raising questions about whether the A and B share system is in the best interest of shareholders.
Morgan Stanley, one of the largest shareholders of the New York Times, has been critical of the newspaper company’s governance and has launched a campaign to change the dual classes of stock.
The Times, however, says only the controlling Sulzberger family trust can change the two-tier structure.
Morgan Stanley Investment Management holds about a 7.6% stake in the Times. Fund Manager Hassan Elmasry has criticized the newspaper company’s strategy, compensation of top officers, capital structure and decision to build a new office in mid-town Manhattan.
Meanwhile, members of the Bancroft family, which controls about 64% of Dow Jones' voting stock, have rejected a $5 billon takeover bid by Rupert Murdoch’s News Corp.
The price of Dow Jones shares has more than doubled since the offer was announced, but it's unclear yet whether enough Bancrofts will change their minds about turning over ownership of the Wall Street Journal to Murdoch to make the deal happen. In the meantime, common shareholders have little say in the proposed takeover.
“Today, A/B share ownership is a detriment because it prevents holders of the common shares from being able to influence the direction of the company,” DeGraw said.
Rejecting Nissan Alliance
Last July, the Ford family rejected an alliance with Nissan and Renault that would had required the Fords to abandon the dual-share structure, according to news reports.
Alan Mulally, Ford’s CEO, negotiated a severance package that could total about $15 million plus options for three million Ford shares if the Ford family loses control of the company within five years.
Rather than abandon the troubled company, the Ford family negotiated about $23.4 billion in bank loans and debt convertible to shares and closed 16 North American plants and cut about 40,000 jobs in an effort to make the company competitive and consistently profitable.
It will probably take a series of shareholder lawsuits, acquisitions or a sharp reversal in a company's fortunes, to change the current dual class stock system, financial experts say.
If Mulally fails to turn the automaker around, for example, the Ford family may have to rethink giving up control.
“Those companies with A/B shares and no regulatory issues are dinosaurs and will fade over time,” DeGraw said.