At the end of March, online food delivery company Deliveroo hopes to raise £ 1 billion when it goes public (IPO). The IPO is expected to value Deliveroo between £ 7.6 billion and £ 8.8 billion ($ 10.5 to $ 12.1 billion). The deal will mark the largest IPO on the London Stock Exchange since mining company Glencore debuted at $ 60 billion in a dual London-Hong Kong IPO in 2011.
Deliveroo plans to use a dual class share system, in which some shares offer greater voting rights than other shareholders. By offering dual-class stocks, Deliveroo will join a host of tech companies like Facebook, Shopify, Lyft, Zoom and, most recently, Bumble.
Double-class stocks have been a hot topic of discussion for many years. A study by the National Bureau of Economic Research found that while large stakes held by executives tend to improve company performance, insider voting control weakens it.
Double-class actions have divided
Dual-class stocks are often used in companies run by the founder where the founder is the CEO, chairman or board of directors. They allow founders to retain more control than is typically possible in single-class stock systems. Proponents say the dual-class method allows the founder to focus on the long-term view of the business and isolates the business from the short-term mindset of Wall Street investors. Dual class shares also isolate the business from acquisition, as this would typically require the founder’s agreement for non-founders to acquire a controlling stake.
However, investors and corporate governance experts have warned that dual-class equity structures are undemocratic. Investors overwhelmingly favor the principle of one share, one vote. They fear that dual-class systems will create a gap between control and economic ownership that reduces the liability of owners. The Council of Institutional Investors (CII), which represents fund managers with $ 25 billion in assets, requires that any company’s dual-class share structure be limited to seven years and approves the principle of one share. , a voice.
Companies with double-class stocks underperform on environmental measures
GlobalData’s ESG framework advises against companies using double-class stocks on the grounds that they make founders less accountable to other investors in the company. In a recent journal article, professors at the University of Denver found that, on average, double-class companies underperform their single-class peers on environmental metrics, and the gap stems from double-class companies. where insiders have more control over the vote, compared to their stake in the capital.
In a 2018 open letter to MSCI, BlackRock – the world’s largest asset manager – expressed the view that effective voting rights are at the heart of property rights. The company strongly believes in one voice, one action as a guiding principle of good corporate governance. BlackRock has warned companies that it will take voting action when it finds insufficient climate progress in business models and corporate disclosures. In July 2020, BlackRock began to carry out the threat. She voted against running 69 companies in a group of 440 that she identifies as carbon intensive.
Double-class actions weaken the positive feedback loop
BlackRock, alongside other institutional investors, governments, employees, NGOs and clients, is pushing all companies to reduce their greenhouse gas emissions and strengthen their commitments on climate change. The result is a positive feedback loop in which stakeholders harness market forces to drive this positive change towards more sustainable operations. At the heart of this feedback loop is shareholder voting action. Double-class stocks could potentially dilute the feedback loop, which ultimately would have negative consequences for the environment.
In the years to come, as the climate emergency progresses, we expect the feedback loop to intensify as investors vote more, clients voice their concerns louder, and governments impose reductions. stricter regulations. One of the outcomes will be the push to phase out dual-class share structures in favor of one-share, one-vote plans. Deliveroo will have to demonstrate its willingness to listen to investors’ demands, in particular when it comes to climate change or when faced with investors who take their capital elsewhere.