SUSTAINABLE FINANCE NEWSLETTER-The SpaceX IPO and the lost battle for shareholder rights: Ross Kerber

By Ross Kerber

May 13 (Reuters) - I've lost count of all the stories I've written that quote fancy investment bosses decrying the rise of unequal proxy voting rights that entrench the power of corporate insiders. Here's one from a decade ago in which T. Rowe Price's TROW.O corporate governance leader outlined plans to vote against directors of dual-class companies.

The idea was to remind boards of a basic principle of American capitalism: ordinary investors should expect their dollars to buy the same voting rights the big shots receive. One share, one vote was a motto directors were supposed to remember or face being voted out of the club.

"To just endorse their re-election every year sends the wrong message," T. Rowe's then-head of corporate governance Donna Anderson said at the time.

How quaint! Anderson has since retired and I couldn't find any executive of her stature willing to voice the same point of view, either at T. Rowe Price or among other major asset managers or pension funds.

The explanation is that Anderson's side lost the argument, as the pending SpaceX IPO will show.

Excerpts of SpaceX's IPO registration statement reviewed by Reuters say the company is combining supervoting shares, mandatory arbitration, stricter ​rules on shareholder proposals and Texas corporate law to give control to SpaceX CEO Elon Musk and other insiders. SpaceX also will limit investors' ability to challenge management, sue in court and force proxy votes.

No problem, say backers of concentrated control, and those who regard Musk as a visionary ready to make his investors rich.

But some corporate governance observers warn that the limits would allow Musk to establish an untouchable power base through the rocket and satellite-communications business. So whatever happened to the institutions that once seemed to be standing up for the little guys? Shouldn't they avoid this IPO?

SO MUCH HYPE

Columbia University Law Professor Dorothy Lund said it's hard to blame big fund firms and public pension systems that in theory could refuse to own shares with little leverage. That could put those funds at odds with their own investors and participants who want in on the glamorous launch company.

"There's so much hype around this IPO," Lund said. She added: "There are not a lot of other IPOs. Musk is rightly taking advantage of his leverage; he’s using this leverage to come up with the most advantageous terms for himself."

For what it's worth, disclosures show T. Rowe funds continue to put Anderson's approach into practice at other public companies with unequal voting rights such as Facebook parent Meta Platforms. There, T. Rowe funds withheld support from directors such as Peggy Alford, chair of Meta's governance committee. The rationale, a disclosure states, was that "the company has superior voting rights without economic control."

Top fund managers BlackRock and Vanguard voted for Alford, records show.

Such votes are largely symbolic at a company like Meta, where CEO and founder Mark Zuckerberg controls 61% of voting rights. Still, negative ballots and critical comments are the main influence the asset managers have left, especially those running index funds that cannot sell particular stocks.

None of the fund firms would comment for this article.

EVERYONE WANTS TO BE SPECIAL

Concerns about insiders taking extra power over public investors spiked in 2017 when social media provider Snap sold $3.4 billion of shares with no voting rights. Zero, zip, nada.

Responses by index providers included a shift by S&P Dow Jones to ban companies with multiple share classes from major indices. The firm reversed course in 2023, citing feedback from market participants.

Asked about SpaceX, an S&P representative said via e-mail it was studying further changes regarding its treatment of what it calls "MegaCap" companies, or those among the 100 largest in its Total Market Index..SPTMI

Now everyone wants to be special. Some 60% of S&P 500 companies that went public in the last decade have unequal voting rights, compared to 8% for the whole index, according to data and analytics provider ISS-Corporate.

Being special doesn't make you good. Of the 10 largest U.S. IPOs since 2011, most have leaders with a significant share of voting power. Over the last five years none have beaten the total shareholder return of 108% recorded by the Nasdaq 100 index, according to a review by researcher Equilar.

SpaceX wants early inclusion in the Nasdaq 100, which would boost demand by forcing index funds to buy the stock. The company did not return messages seeking comment. In theory it could still include provisions in its IPO to diminish Musk's control over time, in line with the good-governance dreams of the experts. Don't hold your breath.

Robert McCormick, executive director of the Council of Institutional Investors, one of the most consistent critics of dual-class shares, said the group was disappointed when the indexes reversed course.

He expects the group soon will ask SpaceX to "sunset" the dual-class structure in seven years and move to equal voting, as other companies have done.

"A fundamental principle is one share, one vote. It's a pretty basic expectation of how a public company should operate," McCormick told me.