By Paul Seaborn & Tricia Olsen
The decisions of large corporations can have significant environmental impacts, such as increasing air pollution or shifting to more renewable sources of energy. As a result, there is much interest in identifying corporate governance structures that may encourage better environmental performance. In our paper, we examine firms with a dual-class share structure where insiders (officers and directors) have voting control over the firm that exceeds their ownership stake. We find that when these insiders have significantly more voting control, their firms demonstrate poorer, rather than better, environmental performance.
Large corporations attract significant scrutiny, both for how they are managed and how their actions impact society. One management approach that has regained prominence in recent years is the dual-class share structure. When most corporations issue shares, each individual share comes with the same voting rights and the same ownership stake. However, under the dual-class share structure, corporations issue more than one type of shares: typically one type/class is offered to the general public and another class is reserved for insiders, such as founders, key executive officers, and board members. The latter class is given additional voting rights so that these individuals control more votes relative to the number of shares they own. The structure gives these insiders greater say in the voting decisions of the firm, such as selecting a CEO or adopting a new policy, but with less exposure to the stock market consequences of those actions.
While Facebook, Google, Ford Motor Company, Berkshire Hathaway, and other prominent firms have adopted dual-class share structures, critics have raised concerns about the consequences for insider decision-making, given the altered incentives and accountability that result. In some cases, detractors have even advocated for stock exchanges to prohibit the structure altogether.
In the midst of this debate, many questions remain about the impacts of the dual-class share structure and of corporate governance more broadly. For example, do dual-class firms differ in various performance outcomes from firms that only have a single class of shares and are more specific factors, such as the degree of additional voting control granted to insiders, relevant to these outcomes?
In our paper, we examine the link between the dual-class share structure and corporate environmental performance, such as energy consumption and emissions, areas where various stakeholders often have conflicting preferences. We make use of third-party environmental ratings that were originally created to allow investors to evaluate firms in this area. In our case, we use them for a comparison of single-class and dual-class firms. Previous research provides no clear indication of whether the dual-share structure will be associated with better or worse environmental performance, or if the structure will matter at all.
We find that, on average, firms that have a dual-class share structure perform worse than their single-class peers on environmental measures. However, this finding alone does not tell us whether most or all dual-class firms are poor environmental performers or if certain types of dual-class firms are behind the result. To learn more, we then examine the relative differences in voting control and equity stakes amongst these dual-class firms. We find that the discrepancy in environmental performance comes primarily from the poor environmental performance of those dual-class firms where insiders have the most voting control, relative to their equity stake.
Our findings suggest that granting corporate insiders significant additional voting control, through the dual class structure or another method, is unlikely to be a panacea for corporate environmental performance. In fact, it may lead to worse environmental outcomes for corporations. Other factors – including customer preferences regarding environmental decisions, pressure from activists, and government regulation – may offer more promise for environmental improvement. Our findings also inform the ongoing debate about the general pros and cons of the dual-class share structure by confirming environmental performance as an area in which dual-class corporations perform differently from their single-class peers.
Reference:
Seaborn, P., Olsen, T.D., & Howell, J. 2020. Is Insider Control Good for Environmental Performance? Evidence From Dual-Class Firms. Business & Society, 59(4).
https://journals.sagepub.com/doi/full/10.1177/0007650317749221