The debate on the conflict between long-term and short-term interests, and on the need to introduce multiple or increased voting for more stable shareholders (differential voting), has been going on for some time now. The theme was the focus of a round table organized on December 4 in the Italian Stock Exchange during the “Italy Corporate Governance Conference”, event sponsored by Assogestioni e Assonymous in collaboration with OECD.
“Differential voting can be effective in promoting transparency and long-term investment by preventing corporate pyramids and shareholder agreements,” he commented in his introductory speech. Marcellus Bianchi, President of the Corporate Governance Committee of the OECD – but to prove valid, two conditions must be met: 1) policy makers must set up solid frameworks of rules to prevent possible abuses; 2) companies must give full disclosure on the reasons for the adoption and prevent conflicts of interest. After that it will be up to the market to make the judgement”.
The split in the market was well reflected in the different positions expressed during the round table (Long-term value creation instruments: the case for and against differential voting"): on the one hand institutional investors such as Igcn e Glass Lewis & Co, on the other two Italian companies that have adopted the increased voting mechanism, Campari and Amplifon.
In fact, in Italy the Competitiveness Decree of June 2014, later converted with amendments into law no. 116 of 11 August 2014, superseded the "one share, one vote" principle in force until then, regulating both multiple votes and majority votes. In this second case, for example, in the case of listed shares, it is a matter of "increased" voting rights in favor of those who own shares of the company for a certain period of time. (learn more about the discipline on the Borsa Italiana website).
THE DOUBTS OF INSTITUTIONAL INVESTORS
George Dallas, ICGN policy director, an organization of over 650 investors which aims to promote effective corporate governance standards which also include the Italian companies Pirelli and Telecom Italia, "the problem is shortermism and differential voting is not necessarily the solution to solve this problem" . "I believe - he added - that differential voting is a bad idea because it can have side effects such as hampering the work of managers and in some cases leading to strong misalignments of interests".
On the same line too Katherine Rabin, CEO of Glass Lewis & Co, a provider of governance services to support the engagement activities of institutional investors in the companies in which they hold stakes: “We recognize that companies are facing concerns related to the shortermism phenomenon – he said – but we believe that these voting systems can get in the way of the board and destroy shareholder value. We believe the shareholder benefits of this structure have not yet been adequately substantiated by academic studies. Furthermore, it is almost impossible for foreign investors to benefit from increased voting rights because the registration process in Italy is not reasonable”.
CAMPARI, HOW WE DEFEND AGAINST TAKE OVERS
Yet the judgment is not so easy. In some cases, as explained by the entrepreneurs called upon to bring their own experience, the increased vote has helped to resolve difficult impasse situations. “If Campari didn't have the increased vote – he explained Luca Garavoglia, president of Davide Campari-Milan – would be subject to a takeover in a short time and the shareholders would be forced to sell. But at the same time I believe that in 10 years the value of the shares would be much higher than the price paid. So majority voting here has a lot to do with not being under time pressure. In the end, you bet on people, allowing certain people to have certain rights is useful". While admitting that the majority vote, advertised to favor long-term shareholders, in the de facto structure is a tool to enhance the control of the relevant shareholders, Garavoglia nonetheless believes that companies, being a set of contracts, should be able to use the tools they want; it will be the market price which will then reflect the goodness or otherwise of the solutions adopted. Especially since the lack of these tools in the past has favored the spread of other structures such as pyramids and agreements between shareholders. “The point is not whether differential voting is good or bad – concluded Garavoglia – but not allowing shareholders to extract private benefits”.
AMPLIFON, AN OPPORTUNITY FOR M&A
He also agreed on this point Ugo Giorcelli, CFO of Amplifon: “We believe that the remuneration of managers and related party transactions are the real aspects to monitor”. For Amplifon, differential voting was a tool that made it possible to unblock the impasse towards further growth. “Faced with an acquisition, the issue of loss of control arises, a blocking point that prevents us from growing further - explained Giorcelli - faced with the legitimate desire of the family to keep control, differential voting has allowed us to unlock this step and continue to grow”.
Two particular cases that seem to support the thesis in favor of differential voting. However, the representatives of institutional investors relaunched. “The strongest argument in favor of differential voting is the protection of a start-up from market forces,” he said George Dallas of ICGN – but it only makes sense for a certain amount of time. Instead, differential voting usually becomes quite irreversible. We believe that the most important issues are, for example, succession plans". “There are cases in which it can work – he admitted Katherine Rabin of Glass Lewis & Co – but it is important that disclosure is given through a description of the path and direction in which it is going, explaining why differential voting makes sense. However, Italy has historically been a closed market, but in the last two years we have seen changes and it seems to us that getting in the way of this path does not make sense”.
Yet in these two specific cases, Amplifon and Campari, institutional investors seem to have substantially sided with the controlling family. “Our main shareholder is the US fund Cedar Rock Capital Limited with 10% that voted in favor of differential voting,” said the president of Campari. “We have a similar situation with Tamburi who voted in favor – echoed Giorcelli of Amplifon – excluding the family, the percentage of votes on the introduction of differential voting was only slightly against but institutional shareholders like Tamburi were in favor ”.
