This post lays out a new approach to shareholder voting designed to increase the voting power of long-term committed shareholders: adding votes to shares based on both long holding periods and high concentrations. Called quality voting, the approach would give more votes to corporate shares held in large amounts for long periods. Quality voting should be far less controversial than dual class share structures and would avoid the drawbacks of time-weighted plans.
The standard default voting rule in U.S. corporations is one share, one vote. Although manifestly democratic, it is neither inevitable nor mandatory. One of the most prominent variations is the dual class structure, adopted by hundreds of companies over many decades and dozens of tech companies in the past decade. It draws controversy, however, because some owners with comparatively smaller economic interests have outsized voting power. While dual class shares have not been outlawed, leading index compilers such as the S&P 500 opted to exclude any newly created dual class companies.
A less visible variation has gained attention and been adopted by a dozen U.S. companies and many large French ones: shares that earn increased votes when held for long periods of time, called time-weighted voting. While rewarding patient long-term investors, such voting risks entrenching incumbents and increasing the voting power of indexers. Quality voting overcomes both these problems.
Time Weighted Voting
The issue with dual class capital structures is that they vest control in a group without matching economic risks: One class has more votes per share than the other for equivalent economic stakes. They insulate the controlling class from short term pressure but also from accountability. If the chief argument for dual class shares is that they pair voting power to vintage, there is a more direct way to do that using time-weighted voting. Time-weighted voting prescribes that a share’s voting power is increased after it has been held for a given number of years. A common approach grants four votes instead of one to each share held longer than four years. When those shares are sold, they revert back to one-vote shares.
Designs can vary to suit, with differences in the definitions of short and long term (upping votes after three or five or 10 years, say), reward increments (adding one vote per two years or two votes per one year), and matters covered (all matters coming to a vote or only designated matters such as mergers). In theory, by rewarding long-term ownership, average holding periods should rise and stock volatility fall.
From the shareholders’ viewpoint, time-weighted voting remains democratic. All shares and shareholders enjoy identical opportunities to gain enhanced voting rights. The chief criticism of time-weighted voting is that holding period length is an imperfect proxy for wisdom or good judgment.
Reasonable people can disagree on whether the resulting concentration of power in longer-term shareholders is superior. If the long-term shareholders are indexers with insufficient interest in particular companies while the newer shareholders are prepared to engage productively, time-weighted voting backfires.
To illustrate, imagine a simple shareholder base, where the period of ownership of outstanding shares is about equally distributed among older and newer shareholders and those in between – such as 33 percent each less than one year, more than three years, and in between.
With 99 shares outstanding, each cohort controls 33 votes. No single cohort can command the outcome of any vote. But if time-weighted voting added three votes to each share held longer than three years, then that cohort would have 99 votes, the others would still have 33 each and a combined 66. The seasoned cohort would then dictate the outcome of every vote. But it is not obvious that such seasoning translates into proportionally greater wisdom for a company.
Default Versus Tenured Voting Power
|Duration & Factor||Normal Votes||Tenured Votes|
|< Year = 1x||33||1x = 33|
|1-3 years = 1x||33||1x = 33|
|>3 yrs. x 3 3x||33||3x = 99|
One way to offset this problem is to delineate further – to grant incremental votes for every year held longer than one, for instance. That would reduce the heavy concentration of voting power in the longest held shares. But while that calibrates power between groups by duration, the power enhancement remains based solely upon duration.
On the other hand, indexers have regulatory incentives to avoid accumulating excessive voting power in given stocks. Under SEC rules, for example, large stockholders of public companies are treated like insiders and must forfeit their profits on purchases and sales of stocks made within six months. These so-called short-swing profit rules, also generally applicable to corporate officers and directors, would hurt indexers that are regularly forced to buy and sell stock as market valuations rise and fall. The effect could be punishing.
Empirical evidence on the effects of time-weighted voting is limited. Only a handful of U.S. companies currently maintain time-weighted voting: Aflac, Carlisle, J.M. Smucker, Quaker Chemical, and Synovus Financial. A few others once employed time-weighted voting but have since rescinded it: CenturyTel, Church & Dwight, Cincinnati Milacron, and Roper and Shaw Group. Researchers who have crunched the data document that time-weighted voting rewards inside ownership and benefits smaller outside owners. They encourage further experimentation with how corporate voting might shape individual companies and influence financial markets. In that spirit, consider quality voting.
Quality voting refines time-weighted voting to account not only for duration but conviction. That is, quality voting grants additional votes to shares owned for a long time in large stakes.
The proxy for conviction is shares representing a substantial portion of a shareholders’ portfolio, measured as a percentage of the shareholder’s total public company equity portfolio. For example, two votes per share could be granted to shareholders allocating between 1 percent and 5 percent of such a portfolio to the company and three votes per share to those allocating more than 5 percent. If tenured voting implicitly assumes that longer-held shares cast higher-quality votes, the hypothesis follows that shares owned by those with greater exposure will also have such merit.
To adjust the previous illustration, suppose portfolio concentration is randomly distributed across durations. Combining duration with concentration, the short term unconcentrated cohort would remain entitled to 33 votes while the longest-holding and most-concentrated would enjoy 199 votes. The outcome of any vote would be determined by a fluid combination of shareholders boasting relatively longer durations and relatively higher concentrations. The following tables illustrate the voting power and the effects by shareholder type.
Quality Voting Power
|Duration Multiple||Concentration Multiple|
|None||< Year = no multiple||< 1% x = no multiple|
|Some||1-3 years = 2x||1-5% = 2x|
|Substantial||> 3 years = 3x||> 10% = 3x|
Votes Given Combinations of Concentration and Duration
|< 1% = no multiple||1% to 5% = 2x||>5% = 3x|
|< 1 year = no multiple||33||66||99|
|1-3 years = 2x||66||132||165|
|>3 years = 3x||99||165||199|
Bold numbers reflect number of votes commanded given concentration and duration levels.
One objection to time-weighted voting is administrative burdens – and these increase with quality voting. Numerous adjustments must be made at inception and regular intervals thereafter. One problem is how most U.S. equity is held in the names of depository nominees rather than ultimate owners, complicating the task of tracking ownership duration and concentration. Companies that rescinded time-weighted voting often cited administrative complexity as a reason. Administering commitment-weighted voting would pose additional cost, particularly in recordkeeping and verification. For example, duration is a fixed measure of time, whereas concentration can vary substantially over time.
On the other hand, holdings are readily observable from public filings for institutional investors and can be verified by reference to disclosure that is legally required and subject to federal anti-fraud rules. For these and other shareholders, enhanced voting power could be made optional and subject to the company’s confirmation of verified shareholder applications.
That simple approach can be implemented immediately for all shareholders, including individuals, by shifting the burden of disclosure to the shareholder: Any shareholder wishing to exercise quality shares would be required to submit qualifying evidence to the corporate secretary accordingly. The secretary can create uniform rules describing what evidence qualifies and standardized procedures to verify it.
Longer term, the challenges of administration are likely to be diminished greatly by automated approaches. Advances in tracking technology, particularly digital ledgers based on blockchain tools, promise to make administration of quality voting manageable. State corporate law now authorizes such approaches to maintaining shareholder lists and some companies, led by Overstock.com, have begun to adopt them. Given research indicating the value to investors of committed long-term ownership and the potential power of quality voting, more companies ought to experiment with this approach.
Scott Hirst & Kobi Kastiel, Corporate Governance by Index Exclusion, 99 Boston University Law Review 1229 (2019).
Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 George Washington Law Review 687 (1986)
Joseph A. Livingston, The American Stockholder 186-87 (1958); Robert Sobel, The Big Board 236 (1965).
John C. Coffee, The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control, 111 Yale Law Journal 1 (2001).
Dorothy S. Lund, Nonvoting Shares and Efficient Corporate Governance, 71 Stanford Law Review 697 (2019).
Dorothy S. Lund, The Case Against Passive Shareholder Voting, Journal of Corporation Law (2018).
Eric Posner & E. Glen Weyl, Quadratic Vote Buying as Efficient Corporate Governance, 81 U. Chi. L. Rev. (2014).
David J. Berger, Steven Davidoff Solomon & Aaron J. Benjamin, Tenure Voting and the U.S. Public Company, 72 Business Lawyer 295 (2017).
Lynne Dallas & Jordan Barry, Long-Term Shareholders and Time-Phased Voting, 40 Delaware Journal of Corporate Law 541 (2015).
This post comes to us from Professor Lawrence A. Cunningham at George Washington University Law School. It is based on a chapter in his forthcoming book, Quality Shareholders.