Corporate Governance and Financial Crisis
April 3, 2025
The ongoing financial crisis has proved that Corporate America and the Corporates in other countries around the world have exhibited behavior that can be described as mismanagement and not keeping in tenets of good corporate governance. In this respect, some of the criticism that has been directed at corporate leaders and the bankers in particular…
The field of corporate governance exists in a symbiotic relationship between the management and the board of directors. It is impossible to talk about corporate governance without taking into account the roles and duties of the board of directors and the expectations from the management. To explain this fully, it would be useful to consider…
The previous articles discussed how good corporate governance is imperative to the existence of a structured and functioning economy. In this article, we look at the ways in corporate governance is practiced in the developed economies of the West and in the developing economies in the rest of the world. To start with, the ongoing…
The long term success of a company depends on the decisions made by its management. The appointment of management is done by the shareholders. However, the problem is that shareholders are considered to be one homogenous group. This is not an accurate reflection of reality. Different kinds of shareholders invest in a company. Some shareholders intend to hold on to the shares for a longer duration of time whereas there are others who would hold on to the shares only for a few days and in some cases just a few minutes.
The rule of law in most countries provides shareholders with equal voting rights no matter how long they hold the shares for. A decade old shareholder has the same rights as a day old shareholder. Proponents who endorse long term right to vote find this unfair. This is because short term shareholders are often speculators. They have nothing to do with the long term interest of the company. Since they have an equal vote, they end up distorting the company’s value creation process.
The French government has introduced differential voting rights in their companies. This means that shareholders who have held the stock for more than 24 months are listed down in what is called, the “loyalty register”. These shareholders have twice as much voting power as an average shareholder. These differential rights are the de facto standard for every company unless they decide to opt out of the process by mentioning it in their articles of association. A similar law is being introduced in Italy as well. Investors all over the world have opposing views regarding this law.
It must also be noted that the shareholders of major companies like the French carmaker Renault have overwhelmingly voted in favor of “one share one vote”. A similar case happened at L’Oreal where more than 95% of the shareholders voted in favor of maintaining the “one share one vote” rule.
Since the issue of loyalty dividends and loyalty shares requires a special majority i.e. 75% vote in Italy, no major Italian company has implemented these rules as of now.
While some believe that this law is a boon for the shareholders, other think it is a bane. In this article, we will understand both these points of view.
To sum it up, differentiated voting rights is a complex issue. There are significant pros and cons to be analyzed in this case. However, the “one share one vote” rule has been entrenched in the corporate culture for very long. Changing this rule will require a lot of influence and will lead to a lot of short term mayhem in the market. Instead of the government making the decision on the company’s behalf, each company can be given the right to decide on its own.
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