Todd Henderson together with Dorothy Shapiro wrote me a thoughtful reply to my post service on non-voting shares. Todd together with Dorothy:
Response to Cochrane
We are grateful for Cochrane’s thoughtful reply to our op-ed inwards the Wall Street Journal. Space limitations foreclose us from giving the necessary handling to our ideas, but he is right to force us to hold out careful inwards our analysis, no thing the limits. We await frontwards to addressing his concerns together with others inwards a forthcoming article.
In the meantime, hither is a quick reply to the thrust of Cochrane’s critique.
There is a logical inconsistency inwards Cochrane’s post—his “modest proposal” would require to a greater extent than legal alter to make than ours. (And nosotros are the ones amongst a vested involvement inwards to a greater extent than law!) For one, it’s non clear that companies would willingly number non-voting stock inwards improver to voting stock (and inwards the right amounts)—this occurs real rarely inwards practice, if ever.
Second, fifty-fifty if the shares existed, Cochrane assumes that index funds would willingly purchase them, although there’s no evidence to suggest that this would occur.
The hostile reaction from large passive institutional investors, including BlackRock together with Vanguard, to the Snapchat IPO together with other recent dual shape stock offerings brand it clear that passive funds wouldn’t purchase non-voting stock willingly—institutional investors participated inwards those offerings nether protestation together with direct maintain since been advocating for reforms that would foreclose futurity non-voting offerings, fifty-fifty going thus far every bit to entrance hall Russel FTSE to delist companies that direct maintain dual shape shares.
It’s also unlikely that non-voting stock would hold out much cheaper than voting stock—empirical evidence has demonstrated that often, non-voting stock doesn’t merchandise at whatever discount to voting stock (such every bit when there's a controlling shareholder or the companionship is good run).
Even if passive funds could purchase non-voting shares at a little discount, it’s non obvious that they would direct maintain whatever incentive to do so. Index funds direct maintain the sole finish of replicating the surgical physical care for of an index. Why would they desire to larn a different production for a lower price? This is peculiarly truthful when doing thus would drive them to surrender ability together with influence over some of the companies that they invest inwards (for a little do goodness that investors are unlikely to recognize).
So, nether Cochrane’s proposal, the constabulary would direct maintain to non alone require companies to number non-voting shares, it would also require to require index funds to purchase them. Talk almost a lot of law! (Read: coercion.) Not alone would this hold out a to a greater extent than dramatic alter than the i that nosotros propose, it would sure Pb to a worse world. As an example, at that topographic point could hold out liquidity concerns—if passive funds wanted to sell en masse (as tin flame hand off when funds are tracking the same index), at that topographic point would hold out no buyers. And, if passive funds instead wanted to buy, at that topographic point would hold out no sellers (and inwards this situation, it's unlikely that the non-voting shares would actually merchandise at a discount).
By contrast, our solution--encouraging (but non requiring) passive funds to abstain from voting—is much less intrusive. Rather than mandating the creation of a novel marketplace of non-voting shares, nosotros advocate a voluntary legal alter that would permit natural correctives to whatever corner solution. The trace of piece of work organization seems to hold out that if index funds abstain, besides much ability volition hold out vested inwards the hands of activists, non all of whom volition hold out interested inwards long-term shareholder value. But if index funds are just encouraged to abstain unless they direct maintain no rigid involvement inwards the outcome, together with then at that topographic point is a natural, market-based corrective to this problem. If activists larn overboard, together with then index funds volition direct maintain a rigid interest, together with reenter the voting marketplace at that time. In a sense, Cochrane’s critique is ironic: nosotros are calling for less law. We desire constabulary to operate out of the way, yesteryear letting index funds human activity naturally—to non vote when they direct maintain no involvement inwards doing so, together with where they direct maintain no comparative wages inwards the process. (Our other alternative, a legal duty to vote inwards an informed matter, together with non just blindly follow ISS together with other proxy advisors, is a clear minute best.)
***
Influenza A virus subtype H5N1 piffling response-response clarification:
I do non envision whatever coercion! So I deny "under Cochrane’s proposal, the constabulary would direct maintain to non alone require companies to number non-voting shares, it would also require to require index funds to purchase them."
Index funds require to wake upward together with enquire for non-voting shares, together with and then companies volition number them. The funds larn a discount together with absolution from legal trouble. Or companies require to wake upward together with offering non-voting shares to index funds. The companies larn a novel source of financing.
The non-voting shares I direct maintain inwards hear require do require a lot of smart lawyering together with contract writing yesteryear people similar Todd together with Dorothy. I direct maintain the signal that electrical current non-voting shares are non every bit protected every bit they should be, that the hope ``you larn just every bit much coin every bit the voting shares, together with you lot tin flame sue every bit bondholders do if you lot don't'' needs teeth.
Indeed, the marketplace is hostile to non-voting shares because electrical current non-voting shares are designed to concentrate command amongst insiders, non to do a vibrant exterior marketplace for corporate control. That's the terminal thing insiders want, together with a argue that companies volition hold out dull to offering such shares unless funds commencement demanding them.
Sometimes the basis hasn't arrived yesteryear itself at the optimum, just because nobody persuasion of it, non because at that topographic point is a marketplace failure, together with non because constabulary has non compelled it. We alive inwards a fourth dimension of legal together with fiscal innovation, non just gadget innovation.
And index funds non voting aggressively is non a screaming occupation that can't convey some fourth dimension to form out.
(How to commencement a struggle inwards a libertarian bar -- "You're advocating authorities intervention! No, you're advocating authorities intervention! I in all probability should direct maintain left that out of the original, together with at that topographic point is non much require to pass fourth dimension on it inwards farther discussion. Laws together with contracts together with courts are all on the bill of fare at the libertarian bar.)
***
Update:
This is a practiced point. Perhaps nosotros just require some practiced intermediation/financial applied scientific discipline for index funds to routinely lend out their shares roughly votes.
Update two here
Response to Cochrane
We are grateful for Cochrane’s thoughtful reply to our op-ed inwards the Wall Street Journal. Space limitations foreclose us from giving the necessary handling to our ideas, but he is right to force us to hold out careful inwards our analysis, no thing the limits. We await frontwards to addressing his concerns together with others inwards a forthcoming article.
In the meantime, hither is a quick reply to the thrust of Cochrane’s critique.
There is a logical inconsistency inwards Cochrane’s post—his “modest proposal” would require to a greater extent than legal alter to make than ours. (And nosotros are the ones amongst a vested involvement inwards to a greater extent than law!) For one, it’s non clear that companies would willingly number non-voting stock inwards improver to voting stock (and inwards the right amounts)—this occurs real rarely inwards practice, if ever.
Second, fifty-fifty if the shares existed, Cochrane assumes that index funds would willingly purchase them, although there’s no evidence to suggest that this would occur.
The hostile reaction from large passive institutional investors, including BlackRock together with Vanguard, to the Snapchat IPO together with other recent dual shape stock offerings brand it clear that passive funds wouldn’t purchase non-voting stock willingly—institutional investors participated inwards those offerings nether protestation together with direct maintain since been advocating for reforms that would foreclose futurity non-voting offerings, fifty-fifty going thus far every bit to entrance hall Russel FTSE to delist companies that direct maintain dual shape shares.
It’s also unlikely that non-voting stock would hold out much cheaper than voting stock—empirical evidence has demonstrated that often, non-voting stock doesn’t merchandise at whatever discount to voting stock (such every bit when there's a controlling shareholder or the companionship is good run).
Even if passive funds could purchase non-voting shares at a little discount, it’s non obvious that they would direct maintain whatever incentive to do so. Index funds direct maintain the sole finish of replicating the surgical physical care for of an index. Why would they desire to larn a different production for a lower price? This is peculiarly truthful when doing thus would drive them to surrender ability together with influence over some of the companies that they invest inwards (for a little do goodness that investors are unlikely to recognize).
So, nether Cochrane’s proposal, the constabulary would direct maintain to non alone require companies to number non-voting shares, it would also require to require index funds to purchase them. Talk almost a lot of law! (Read: coercion.) Not alone would this hold out a to a greater extent than dramatic alter than the i that nosotros propose, it would sure Pb to a worse world. As an example, at that topographic point could hold out liquidity concerns—if passive funds wanted to sell en masse (as tin flame hand off when funds are tracking the same index), at that topographic point would hold out no buyers. And, if passive funds instead wanted to buy, at that topographic point would hold out no sellers (and inwards this situation, it's unlikely that the non-voting shares would actually merchandise at a discount).
By contrast, our solution--encouraging (but non requiring) passive funds to abstain from voting—is much less intrusive. Rather than mandating the creation of a novel marketplace of non-voting shares, nosotros advocate a voluntary legal alter that would permit natural correctives to whatever corner solution. The trace of piece of work organization seems to hold out that if index funds abstain, besides much ability volition hold out vested inwards the hands of activists, non all of whom volition hold out interested inwards long-term shareholder value. But if index funds are just encouraged to abstain unless they direct maintain no rigid involvement inwards the outcome, together with then at that topographic point is a natural, market-based corrective to this problem. If activists larn overboard, together with then index funds volition direct maintain a rigid interest, together with reenter the voting marketplace at that time. In a sense, Cochrane’s critique is ironic: nosotros are calling for less law. We desire constabulary to operate out of the way, yesteryear letting index funds human activity naturally—to non vote when they direct maintain no involvement inwards doing so, together with where they direct maintain no comparative wages inwards the process. (Our other alternative, a legal duty to vote inwards an informed matter, together with non just blindly follow ISS together with other proxy advisors, is a clear minute best.)
***
Influenza A virus subtype H5N1 piffling response-response clarification:
I do non envision whatever coercion! So I deny "under Cochrane’s proposal, the constabulary would direct maintain to non alone require companies to number non-voting shares, it would also require to require index funds to purchase them."
Index funds require to wake upward together with enquire for non-voting shares, together with and then companies volition number them. The funds larn a discount together with absolution from legal trouble. Or companies require to wake upward together with offering non-voting shares to index funds. The companies larn a novel source of financing.
The non-voting shares I direct maintain inwards hear require do require a lot of smart lawyering together with contract writing yesteryear people similar Todd together with Dorothy. I direct maintain the signal that electrical current non-voting shares are non every bit protected every bit they should be, that the hope ``you larn just every bit much coin every bit the voting shares, together with you lot tin flame sue every bit bondholders do if you lot don't'' needs teeth.
Indeed, the marketplace is hostile to non-voting shares because electrical current non-voting shares are designed to concentrate command amongst insiders, non to do a vibrant exterior marketplace for corporate control. That's the terminal thing insiders want, together with a argue that companies volition hold out dull to offering such shares unless funds commencement demanding them.
Sometimes the basis hasn't arrived yesteryear itself at the optimum, just because nobody persuasion of it, non because at that topographic point is a marketplace failure, together with non because constabulary has non compelled it. We alive inwards a fourth dimension of legal together with fiscal innovation, non just gadget innovation.
And index funds non voting aggressively is non a screaming occupation that can't convey some fourth dimension to form out.
(How to commencement a struggle inwards a libertarian bar -- "You're advocating authorities intervention! No, you're advocating authorities intervention! I in all probability should direct maintain left that out of the original, together with at that topographic point is non much require to pass fourth dimension on it inwards farther discussion. Laws together with contracts together with courts are all on the bill of fare at the libertarian bar.)
***
Update:
Update two here
