Our concerns about Comcast go back a long way. Our predecessor company, The Corporate Library (now GMI Analyst, a part of MSCI), we gave Comcast and its board a rare F rating for catastrophically poor corporate governance. If there was a lower grade than F, we would have given it to them. And if we were still grading boards of directors, we would give it to them again.
While they have made some cosmetic improvements to improve the appearance of the independence of the board, the Roberts family’s control via super-voting shares means that — as we say every time the issue of super-voting shares comes up — the Roberts family wants the access to capital of a public company and the control of a private company. Of course that is a win-win for insiders, but that means it is hard to be a winner if you are not part of the family.
The investor community has been increasingly concerned about the imbalance of super-voting shares, and the Council of Institutional Investors has proposed that any uneven-voting shares at an IPO have a sunset provision. In the UK, where they have just adopted the most robust stewardship code in the world, the new standard for other jurisdictions to aspire to, corporate insiders are pushing back by suggesting fewer restrictions on dual class stock. George Dallas, one of the most respected authorities on international corporate governance, wrote in the Financial Times:
The Stewardship Code seeks to encourage and empower shareholders to use their voting rights intelligently and responsibly to hold companies to account on key matters including board composition, remuneration and capital resolutions.
The introduction of dual class share structures in the UK would be anathema to this: it would have the effect of watering down the voting voice of shareholders to the point that minority shareholders do not matter. This is not only a form of regulatory schizophrenia vis-à-vis stewardship, but we need to emphasise that dual class structures are not welcomed by investors. Of the International Corporate Governance Network’s investor members (whose aggregate assets under management exceed $34tn), more than 80 per cent responded negatively in a recent member survey against dual class shares.
And why? Because…dual class shares erode accountability to management and have the effect of entrenching managers and controlling owners. While in the short term this might protect a young company from the animal spirits of financial markets, the trade-off is not positive longer term for minority investors, or indeed for the company itself.
The reason is that dual-class stock upsets the balance essential for the credibility of the capitalist system. The agency costs/conflicts of interest inherent in other people’s money (capital) is mitigated by structures like the checks and balances of the board/executives/shareholders, by the transparency requirements (audited financials, disclosure of related party transactions like the family use of private jets and insider deals on the Comcast proxy statement), and the strictest legal standard our system has, the fiduciary standard.
If there is some legitimate reason for dual-class stock, therefore, the insiders need to take every possible step to reassure their outside investors that they are honest stewards. At a minimum, that includes making sure that the board is made up of independent outsiders, including an independent chair, as well as, for example, independent verification of the legitimacy of the related party transactions and significant engagement with the outside shareholders.
Those kinds of steps could prevent the mess Comcast is in now over their inexplicably clumsy decision to drop the STARZ channel in favor of EPIX. How clumsy? They are still promising it in their advertising, mostly likely the result of a lack of coordination than an intentional bait and switch, but it is still misleading.
Just this year, we have seen a number of CEOs replaced because of statements or behavior that posed a risk to the company’s brand or operations. This is near-impossible at insider-controlled dual-class stock companies (though it does happen in extreme situations, after irreparable damage has been done). If Comcast shareholders were on an equal basis with the insiders, it is unlikely the company would have pursued a brand-risking racial discrimination lawsuit all the way to the Supreme Court after an embarrassing $9.1 million fine and refunds for thousands of customers for breaking Washington state’s consumer protection law more than 445,000 times. And it is unlikely they would be dropping a cable channel that is important to POC as customers and content providers.
DOJ is looking into this decision, Shareholders will be, too. And if Comcast had one share, one vote, they could play the essential market-based oversight that keeps companies vital. Now would be a good time for the rest of the board and the outside shareholders to remind the Roberts family that they have a triple fiduciary obligation to Comcast shareholders as executives, directors, and controlling shareholders.