Stocks of Canadian companies with dual-class share structures have outperformed those with single-class shares over the past two decades, according to analysts at the Canadian Imperial Bank of Commerce.
A new report titled The Evils and Virtues of Dual Class Share Structures shows that such arrangements, in which some shareholders have less say in company matters than others, regardless of the economic size of their stakes, have greater potential to generate investor returns, despite possible threats to corporate governance.
“Generally, we are opposed to the use of unequal voting rights across share classes. However, the relative outperformance of Canadian DCS equities over the last 20 years suggests there are instances where unequal voting can unlock superior long-term returns for all shareholders,” the analysts wrote. The report comes from CIBC’s portfolio strategy group, which includes analysts Shaz Merwat, Ian de Verteuil, Jin Yan and associate Jinzhu Zhai.
As the chart shows, a dual-class share portfolio was up 513 per cent from 2002 onward compared with the S&P/TSX Composite Index’s gain of 390 per cent.
The largest contributors to outperformance included dual-class share companies Brookfield Corp. BN-T, which was up 2,202 per cent over the measurement period, Shopify Inc. SHOP-T (466 per cent), Alimentation Couche-Tard Inc. ATD-T (5,070 per cent), CGI Inc. GIB-A-T (1,001 per cent) and Teck Resources Ltd. TECK-B-T (1,117 per cent). CIBC weighted companies by market capitalization, meaning a big company with a high return contributed more to outperformance than a smaller company with a huge return.
The dual-class portfolio came out on top, even though it didn’t include some of Canada’s high performers with a single-class share structure, such as Royal Bank of Canada RY-T (up 955 per cent), Canadian Natural Resources CNQ-T (2,819 per cent), CNR-T (1,612 per cent), Toronto-Dominion Bank TD-T (792 per cent) and Canadian Pacific Kansas City CP-T (2,081 per cent).
TSX companies with dual-class shares
outperform the market
Total return percentage since 2002
700
S&P/TSX Composite Index CAGR: 7.6%
600
S&P/TSX Dual-Class Share CAGR: 8.7%
500
400
300
200
100
0
-
1
0
0
2002
2007
2012
2017
2022
the globe and mail, Source: cibc capital markets
TSX companies with dual-class shares
outperform the market
Total return percentage since 2002
700
S&P/TSX Composite Index CAGR: 7.6%
600
S&P/TSX Dual-Class Share CAGR: 8.7%
500
400
300
200
100
0
-
1
0
0
2002
2007
2012
2017
2022
the globe and mail, Source: cibc capital markets
TSX companies with dual-class shares outperform the market
Total return percentage since 2002
700
S&P/TSX Composite Index CAGR: 7.6%
600
S&P/TSX Dual-Class Share CAGR: 8.7%
500
400
300
200
100
0
-100
2002
2007
2012
2017
2022
the globe and mail, Source: cibc capital markets
The CIBC analysts arrived at a conclusion similar to that of analysts at the National Bank of Canada, who have highlighted the upsides of dual-class structures in reports called Family Advantage. The bank also maintains a stock index called the NBC Canadian Family Index.
The research from National Bank recognizes the large role dual-class companies have played in Canadian business and for investors. In addition to the outperformers, dual-class companies include Toronto Stock Exchange stalwarts Power Corp. of Canada POW-T, Canadian Tire Corp. Ltd. CTC-T and Rogers Communications Inc. RCI-B-T.
Proponents of dual-class shares say the structures enable founders to pursue a long-term vision for a company, rather than focus on quarterly results. They also argue that dual-class shares protect organizations from investor activism, which they say could stand in the way of the firm’s growth.
Governance advocates, however, bristle at structures that give supervoting rights to founders and their families, arguing that such structures disenfranchise common shareholders and can serve to entrench unresponsive management teams.
The dual-class issue burst into the headlines with the controversy that unfolded two years ago at Rogers. Chair Edward Rogers replaced five independent directors by using his special powers as the company’s heir after the board of directors proposed his removal as chair. While the Rogers family is far from the largest investor in the company, it owns 98 per cent of the voting stock, according to the NBC Canadian Family Index.
“In our view, the end goal from a corporate governance perspective should be one share, one vote,” the CIBC researchers stated. “However, there are arguments supporting the use of unequal voting.”
The proportion of S&P/TSX Composite Index companies with dual-class equities has declined over time, from 25 per cent in the 1980s to under 13 per cent today, the CIBC report said. Over the past 40 years, dual-class shares represented approximately 15 per cent of the market capitalization of Canadian equities.
The research comes at a time when proxy services are toughening their stance against the equity structures.
Proxy advisory firm Institutional Shareholder Services announced late last year that, starting in 2023, it would recommend voting against certain directors of public companies with supervoting structures in the United States. But this policy does not currently apply to Canada, nor is ISS contemplating future changes at the moment, John Vizikas, head of Canadian research at ISS, said in an e-mail.
“There does not appear to be a consensus from Canadian investors that all dual-class structures are automatically bad,” Mr. Vizikas said. “The history behind dual-class in Canada is different from that in the U.S. and with certain minority shareholder protections in place, dual-class seems to be acceptable to many Canadian investors.”
Proxy advisory firm Glass Lewis & Co., however, introduced negative recommendations in 2022 for Canadian companies with dual-class share structures.
Many new public companies with high growth potential are coming to the market with dual-class shares. Critics who propose stricter regulations over the structures say that there must be mechanisms to protect investors, such as event-based sunset clauses. Those take effect, for instance, when a founder ceases to be relevant to the management of the business.
Catherine McCall, chief executive officer of the institutional investor group Canadian Coalition for Good Governance, said that “Canadian investors would be equally as interested in sunset provisions as U.S. investors.”
“The majority of our members would say that, on principle, dual-class shares are not a good governance idea,” Ms. McCall said in an interview.
“But, acknowledging that they are here, and they are a fact of the Canadian markets, we think that there are certain conditions that can be attached to dual-class shares that lessen their negative aspects,” she added.
The Globe and Mail’s Board Games, a ranking of corporate governance practices at Canada’s largest companies, penalizes firms with dual-class share structures or other provisions that result in unequal voting rights. With 10 marks out of 100 total points available for companies with equal voting rights for all shareholders, it’s the single most heavily weighted question in Board Games.
In the latest edition of Board Games, out of the 223 companies in the S&P/TSX Composite Index ranked, 34, or 15 per cent, failed to obtain full credit for the question, with 16 of them earning zero points.