While the principle of "one man, one vote" is recognized in the U.S. political system, it does not always hold true for U.S. investors. About 5 percent of the companies in the S&P 1500 have more than one class of shares, where owners of some shares are entitled to one vote per share while holders of other classes of stock get five or even 10 votes for every share they own.
Long a sore point among some investors, the multishare structure is back in the forefront because of two recent developments.
A study found that in the long run, one-vote-per-share companies generally perform better than companies with more than one class of shares. The study was done by the Investor Responsibility Research Center Institute, a nonprofit that promotes corporate responsibility and informed investing, and Institutional Shareholder Services, which advises institutional investors on CEO pay and other proxy matters.
And the Council of Institutional Investors, a group of pension funds and other large investors that represents more than $3 trillion in assets, recently asked the New York Stock Exchange and Nasdaq to make companies with two or more classes of shares with unequal voting rights ineligible for listing.
"The fact that the council is taking this [issue] up certainly elevates its profile. That's a good thing from my perspective," said Andrew Karolyi, a finance professor at Cornell University.
He said companies where family members or other insiders control a large percentage of voting rights pose a number of potential problems for investors. Disproportionate voting rights can influence who controls a company's board of directors and how much officers and directors are paid.
The investors council said the problems of excess CEO pay and related-party transactions -- where a company does business with other companies controlled by insiders -- are more common at companies with multiple share classes.
"You can have a situation where a family or group of founders controls the board," council executive director Ann Yerger said. "We take the issue very, very seriously."
So should investors, according to the results of the IRRC/ISS study. Their researchers looked at 79 companies that have multiple share classes with unequal voting rights. The companies included Warren Buffett's Berkshire Hathaway, Comcast, The New York Times and The Washington Post.
The argument for having unequal share classes is that it frees companies from the short-term pressures investors put on them, allowing management to focus on matters that will promote long-term success.
If that were the case in the real world, companies with multiple share classes would have poorer short-term results than the overall market and better long-term returns.
But researchers found the exact opposite. On the whole, the multiple share class companies outperformed the S&P 1500 over the one-year period ending Aug. 31 but turned in poorer results for the three-, five- and 10-year periods ending the same day.
"These companies performed worse long-term, are riskier long-term," IRRC executive director Jon Lukomnik said.
Two Pittsburgh companies were among those researchers examined: Federated Investors and Dick's Sporting Goods. While both outperformed the S&P 1500 index over the one-year period ended Aug. 31, Federated lagged the index over the three-, five and 10-year periods while Dick's handily beat the index over all those periods.
Dick's has two classes of shares, with holders of its publicly traded common stock entitled to one vote per share while its Class B shares, controlled by chairman and CEO Edward W. Stack, are entitled to 10 votes per share. As a result, Mr. Stack controls 65.8 percent of the company's voting power, according to the Findlay retailer's most recent proxy statement.
At Federated, a trust controlled by co-founder and chairman John F. Donahue and his son J. Christopher Donahue, president and CEO of the Downtown investment firm, controls all of the company's voting stock. Investors who own Federated's publicly traded shares do not get a vote.
J. Christopher Donahue said the stock structure dates back to the company's origins and is a source of stability. Investors in Federated's stock and mutual funds take comfort in the fact that management has a considerable stake in how the company performs, he said.
"This is a way of showing the market we're in it for the long haul," Mr. Donahue said.
Dick's declined comment.
Four of the most recent, highest-profile initial public offerings involved companies with unequal voting rights: Facebook, LinkedIn, Zynga and Groupon. All of them have share structures that allow founders to control a majority of the voting stock.
Given the fees that companies pay to get listed on major exchanges, Mr. Karolyi does not think NYSE and Nasdaq will go along with the council's suggestion not to list such companies.
"That would probably kill 10 to 15 percent of their business," he said.
Ms. Yerger hopes the exchanges will listen to the request "with a very open mind."
"The council is used to very long battles for reform," she said. "It should be one share, one vote."
Len Boselovic: email@example.com or 412-263-1941.