If you hold any companies that have a dual-class share structure, prepare yourself for mediocracy. In the Winter 2007 edition of the Canadian Investment Review, which is periodical aimed at fund managers and pension plan administrators, they highlight just how bad these stocks typically performs. Before I get into the specifics, let’s talk about what a dual-class share is.
Dual-class shares mean simply that a company has two versions of its stock available to the market. One is typically the shares that you and I can buy on the open market by placing a trade with our discount brokers. The other shares are more tightly held, such as by a controlling family or group of investors. Simply put, a small group of shareholder managers can control a disproportionate amount of votes relative to their equity investment. This suggests that there is weak alignment between what these owner-managers interests and those interests of outside shareholders. The risk is that these votes can be used to manipulate the actions of the company for the personal benefit of the controlling shareholders.
So how much more worse do dual-share companies perform? They sell at a discount of anywhere from 1.27 to 1.39 times book value when compared to companies in their peer group. In simple english, this means that these stocks do not reach the same values as their single-class counterparts and you may be losing out on money. From a statistical perspective, it would be better to hold the single-class stock in the industry you are looking at, compared to the dual-class company. Although I didn’t know this type of information at the time, it is a prime reason I have not invested in Canadian companies such as Magna and Bombardier. I want a company that will act for the greater shareholder, not for themselves.
P.S. I know that Berkshire Hathaway has a dual-class share structure – I believe that that company is not the norm when it comes to dual-class shares. Berkshire is the epitome of working for the shareholder and shareholder rights. It is not the same as Hollinger International (Conrad Black).
(Photo Credit: Andrzej Pobiedzinski)