It’s seen as a middle ground between “one share, one vote,” which can be exploited by activist investors whose short-term interests often run counter to those of long-term investors, and a “dual-class” structure in which some classes of shares have more votes and others have as few as none.
To better understand tenure voting, it makes sense to review the three types of stock voting structures in use today.
For more see: The Two Sides of Dual-Class Shares.
One Share, One Vote
Based on the traditional principle that all shareholders should have equal say, one share, one vote requires that for each share of common stock you hold, you get one vote. If you have 10 shares, you have 10 votes. If you own a million shares, you get a million votes.
One share, one vote was the guiding standard until the 1920s and 1930s when multiple voting shares – also known as dual-class shares – came into being.
Problems with One Share, One Vote
Shareholders, like citizens in political elections, often feel their vote doesn’t count, so they don’t bother to cast it.
Equality in shareholder voting also means that everyone has the same power – whether they are investors who have held their shares for years or day traders who shift their loyalties by the minute. This makes one-share, one-vote corporations susceptible to activists looking to turn a quick buck instead of looking to produce long-term sustainability.
It should be noted that many so-called activists argue that their actions save companies from corporate mismanagement, making this a two-sided argument in many respects.
The evolution of dual-class shares, in which some shareholders (typically founders) have more votes per share than holders of common stock, has been controversial, to say the least.
The notion that someone could own a small percentage of a company and yet have a much larger voting representation goes against the traditional bedrock principle of one share, one vote – to say nothing of the notion that in some dual-class setups, some shareholders get no votes at all.
Dual-class stock, however, serves the purpose of giving the founders and leaders of the company the ability to fight off hostile takeovers and unwanted stockholder activism.
Problems with Dual-Class Structure
Dual-class stock structure, many say, creates a culture of “haves” and “have-nots.” Those with high-value voting shares are protected from activists, while those with non-voting or single vote shares have little protection.
In a dual-class structure, the founders typically control the company and make it virtually impossible for other shareholders to push for change or improvement or even influence the makeup of the board of directors.
The tenure voting alternative rewards investors who hold their shares for a specified period by giving them more voting power. The rules may state, for example, that if you hold your single-vote shares for three years, each of those shares will give you three votes.
The idea is to give more power to long-term shareholders and less to short-term traders. The implementation of tenure voting within a dual-class structure gives some additional power (over time) to non-founding shareholders to counteract the power wielded by the founders.
Problems with Tenure Voting
First, tenure voting doesn’t reward the best investors – just those who hold shares the longest. Those who gain more power by staying longer may not be any more inclined to wield that power intelligently than someone who holds his or her shares for a week.
Shareholders may not care about the reward of more votes – especially if they don’t plan to exercise the power it confers on them. In other words, if the reward is perceived as having no value, it won’t influence someone to hold onto those shares.
If regular investors gain more voting power by holding shares, so do founders. There is some concern that this might mitigate gains made by regular investors, especially in dual-class structures where founders already have more voting power.
For more see: Why Shareholders Should Vote Their Proxy.
The Bottom Line
At the end of the day, there is no perfect voting structure. Each has its pros and cons. As with other structures, tenure voting represents an alternative, not a solution.
Many believe, however that given Wall Street’s current attachment to short-term activist solutions and the resulting reaction of founders vis-à-vis dual-class shares, tenure voting may be an idea whose time has come.