The ECGI Roundtable on Loyalty Shares took place on 18 June 2018 at the offices of Jones Day, Brussels, in collaboration with University of Oxford, Faculty of Law, and the Goldschmidt Chair at the Solvay Brussels School of Economics and Management. The event focused on loyalty shares as a legal solution for encouraging long-term ownership, a concept that is promoted by policy makers, including the European Commission, some institutional investors and issuers.
The Roundtable, which was organised by Professors Marco Becht (Solvay School of Economics and Management) and Luca Enriques (University of Oxford) examined a variety of international approaches and attitudes toward loyalty shares. The emphasis was on loyalty shares with “tenure voting” (LSTV) that confer multiple voting rights to shareholders who remain loyal to the company for a certain period of time, typically two years or longer.
A number of observations were highlighted at the roundtable including the fact that companies pursue short-term objectives at the expense of long-term profits, even when the “long-term” is relatively short. The tendency and cost of ignoring truly long-term objectives, like carbon risk, requires further study. There was consensus that loyalty shares with tenure voting should be discussed in the context of control-enhancing mechanisms like certificates without voting rights or dual-class stock. There is clearly a demand for enabling legislation that allows companies to issue shares with tenure voting as could be observed from the case of Italy and now, Belgium. There is also interest from policymakers in Spain and Switzerland on this issue. LSTV structures are predominantly used by families and the state. The availability of LSTV should encourage family companies to list. Family companies have comparatively long investment horizons so this would go a long way towards meeting the long-term horizon objective. However, the evidence presented at the roundtable on Italy was not encouraging since very few family companies have come to the market since the introduction of LSTVs in 2014. Participants expressed great interest in observing the reaction of non-listed family firms in Belgium following the forthcoming introduction of LSTV.
Control-enhancing mechanisms remain controversial and they are opposed by many institutional investors and proxy advisers. In this sense, LSTVs are subject to similar arguments as dual-class shares, both in favour and against. A US proposal to impose a sunset clause on dual-class listings was presented. However, the reaction of the audience was somewhat sceptical. Comments included the prediction that family firms in Europe would not want to list with a sunset clause and the inherent contradiction of rewarding loyalty with extra voting rights that are reversed after a pre-agreed number of years.
Discussions were structured around introductory briefings from academics and practitioners designed to prompt further interventions and debate between all attendees. Participants included Zacharias Sautner (Frankfurt School of Finance & Management), Alessio Pacces (Erasmus University Rotterdam), Genevieve Helleringer (University of Oxford), Anete Pajuste (Stockholm School of Economics in Riga), Ettore Croci (Università Cattolica del Sacro Cuore, Milan), Luca Garavoglia (Davide Campari-Milano S.p.A.), Philippe Lambrecht (Catholic University of Louvain), and Kobi Kastiel (Tel Aviv University).
The full report from the roundtable on Loyalty Shares, including slides and background papers will be available on the website of the European Corporate Governance Institute (ECGI) http://ecgi.global/content/loyalty-shares .