Will Tenure Voting Give Corporate Managers Lifetime Tenure?
Edelman, Paul L.
Thomas, Randall S.
Dual-class voting systems have been widely employed in recent initial public offerings by large tech companies but have been roundly condemned by institutional investors and the S&P 500. As an alternative, commentators have proposed adoption of tenure voting systems, where investor voting rights increase with the length of time that they hold shares. In furtherance of this proposal, some Silicon Valley investors have requested that the Securities and Exchange Commission (SEC) permit the creation of a new stock exchange where all of the companies will be required to use tenure voting systems. Is tenure voting a better choice than dual-class stock for both corporate management and shareholders? In this Essay, we review the arguments for and against tenure voting that have been made in the literature. In order to shed light on these claims' veracity, we generate the first database that documents institutional investor portfolio turnover rates for stocks. We use this data to inform our mathematical voting model of tenure voting to show how its adoption would affect control rights within the corporation. We make two main findings that shed light on this question. First, we show that when corporate management holds a large block of company stock prior to the implementation of tenure voting and retains at least 20%-30% of the total number of company shares on a long-term basis, then tenure voting will ensure that corporate managers maintain control of the company even in the face of an attempted change-of-control transaction by a highly motivated dissident shareholder. Our second important finding is that if corporate management chooses to sell off its large initial block of the company's stock over time, so that inside ownership levels eventually drop down to a low percentage level with the majority of ownership held by institutional shareholders with different investment horizons, then the use of tenure voting systems does little to protect management control in a proxy contest for corporate control. We conclude that tenure voting does indeed represent an intermediate form of voting control from a manager's perspective: it does not guarantee management control, as dual-class share structures do, but it does give control to management who maintain large equity stakes in the firm. Institutional investors are likely to see it as an improvement over dual-class stock structures in terms of giving them corporate governance rights, although it is less advantageous to these shareholders' rights than a one share/one vote voting system.