Beware state schemes to boost long-term share ownership

As part of his electoral goody bag, David Cameron, the UK prime minister, has promised to give small investors the chance to buy shares in part-state owned Lloyds Bank at a discount. He has also vowed that anyone holding those shares for more than a year will get a "loyalty bonus" worth up to £200 per person.

In making the pledge, he is following a Europe-wide trend towards encouraging longer-term share ownership. In France, the newly introduced "Florange law" automatically awards double voting rights to those who own shares for more than two years. In Italy, following new legislation last year, a number of companies have already introduced double voting rights. And at the European Parliament, amendments to the shareholder rights directive have been tabled that would force member states to change the "one share, one vote" rule.

In part, the trend is a response to the anger the financial crisis engendered towards hedge funds, short sellers, and other "irresponsible" investors deemed to have added to the market turmoil. Shareholders with a short time horizon, it is argued, only want a quick buck and do not have the best interests of companies at heart.

There are good reasons to back this view. Research by UBS suggests public companies that have founding families as major shareholders - with either more than half the voting rights, or more than a fifth of the voting rights combined with board influence - have consistently outperformed their respective indices for the past decade, and with less volatility in their share price. Family firms, the research suggests, engage in less value-destructive M&A, hold less debt and focus better on their core business.

This is the same defence used by Paris-based Vivendi in response to demands from an activist US hedge fund that it return more of its €15bn cash pile to shareholders. Vivendi's management, backed by its largest shareholder, Vincent Bollore, says the money is needed to finance the media group's shift in strategic direction. Mr Bollore looks likely to win the argument. At its annual general meeting last week, although more than half of the shareholders voted against adopting double voting rights, they failed to reach the two-thirds majority necessary to overturn the measure. Mr Bollore, who spent nearly €3bn in the run-up to the vote boosting his stake from 5 to 15 per cent, will now see his voting rights increase to 20 per cent by next April and beyond 20 per cent by 2017.

No one knows whether Mr Bollore's strategy will create more value for Vivendi's investors than the alternatives proposed. But the ease with which he has entrenched his position highlights the dangers of the new legislation.

MSCI research suggests that, of the 59 companies in its 6,500-company universe that grant voting rights based on length of ownership, only 12 demonstrated that the rights were a genuine reward for long-term shareholding. At the others, it found instead that double voting rights often coexisted with other control-enhancing mechanisms to preserve the influence of a dominant shareholder. They therefore lessen minority investors' already limited ability to hold management to account or oppose measures benefiting insiders, such as excessive pay.

Double voting rights are also potential barriers to takeovers. It is tempting to suggest this may have influenced governments' desire to introduce them as much as any belief that they encourage long-term value creation. They may also help governments in other ways. In Italy, companies must opt in to double voting rights, rather than opting out as in France. But if they were taken up at Enel, Eni or Finmeccanica, where the government directly or indirectly controls about 30 per cent of the share capital, it would allow the state to maintain its voting rights even if it reduced its ownership.

In France, the temptation for a government to use its powers to these ends is about to be put to the test. At the April 28 annual meeting of GDF Suez, of which the government owns nearly a third, management will propose opting out of double voting rights. When Renault tried this, the state temporarily increased its stake to ensure defeat of the opt-out proposal at its upcoming AGM on April 30.

There is little research to quantify the impact of deteriorating corporate governance on a company's value. But exacerbating the existing divide between minority shareholders and the rest is a retrograde step.

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