Multi-class stock structures were double teamed on Tuesday with two groups attacking them from different angles—that shareholders not only suffer from a lack of control, they also face diminished returns over time.

Coming at the issue from a shareholder advocacy angle, the Council of Institutional Investors (CII)—a non-profit association of pension funds, foundations and endowments —launched a campaign to urge the New York Stock Exchange and Nasdaq to make new companies that have two or more classes of common stock with unequal voting rights ineligible for listing. Letters were delivered to both exchanges on Tuesday morning.

“Dual-class” or “multi-class” stock companies typically have a superior class of shares with more votes per share than the one vote per share (or, in some cases, no vote at all) that typical shareholders enjoy. Company founders, their families, and company insiders typically hold the superior class of shares, giving them majority voting rights even when they hold minority ownership and risk.

“That concentrates voting power into the insiders' hands, giving them effective control of board of director elections and other matters that are put before shareowners for a vote,” the council said in a statement announcing the initiative.

Although the majority of publicly traded U.S. companies adhere to a “one share, one vote” structure where the voting power to elect directors is directly proportional to an investor's capital at risk, an increasing number of start-up companies are opting for multi-class stock structures. Twenty of 170 initial public offerings (IPOs) between January 2010 and March 2012 were by companies with a multi-class, unequal voting stock structure, according to CII.

According to Anne Sheehan, CII chair and director of corporate governance for the California State Teachers' Retirement System, these structures “foster less accountability from boards and company insiders” and these companies are more likely to take actions that conflict with the interests of their shareowners, as well as “more prone to abuses such as excessive CEO pay and related-party transactions and are.”

In its letters to the NYSE and Nasdaq, CII points out that the listing of multi-class stock companies is “essentially prohibited” on other major exchanges, among them the London and Tokyo Stock Exchanges.

The move towards multi-class stock structures by U.S.-listed companies began to escalate in 1984, when Google went public with two classes of common stock – Class B shares held by founders Sergey Brin and Larry Page with 10 votes per share, compared to one vote for the publicly sold Class A stock. The two founders continue to control a majority of the voting power despite holding only 16 percent of the outstanding shares. Earlier this year, Google announced plans to issue a third class of stock that has no voting rights at all.

Recent multi-class IPOs include offerings from Facebook, Groupon, LinkedIn and Zynga included insider-controlled stock classes with seven, 10, or more votes compared to one vote for each share of the widely-held class of stock, CII says. In Zynga's case, the superior class of stock—owned entirely by founder Mark Pincus —has 70 votes per share. 

CII described the argument that these arrangements allow management to concentrate on the long-term growth of the company without worrying about short-term performance as “unconvincing.”

Adding another voice to the attack on multi-class stock structures is new research making a case that controlled companies —particularly those with multiple classes of shares —often underperform for investors over time.

The study, “Controlled Companies in the Standard and Poor's 1500: A Ten Year Performance and Risk Review,” challenges the oft-repeated claim that multi-class voting structures benefit a company and its shareowners over the long term. Compared to companies with dispersed ownership, controlled companies experience more stock price volatility and increased material weakness in accounting controls, it claims.

The study was commissioned and funded by the Investor Responsibility Research Center Institute (IRRCi), an organization that provides thought leadership on matters of corporate responsibility and the informational needs of investors. It was conducted by Institutional Shareholder Services (ISS) and authored by Sean Quinn, a vice president with the proxy advisory firm.

The definition of control used in the study included any person or group owning 30 percent or more of a company's voting power. Like CII, it uses a quartet of high-profile technology companies that recently went public with multi-class governance structures to drive home its point. Of them, only Linked In had rewarded investors as of Aug. 31, with a 138% stock price increase since its initial public offering. By contrast, the stock prices of Zynga, Groupon, and Facebook, fell below their initial public offering (IPO) prices by 72, 79.3 and 52.5 percent, respectively.

Among the key claims of the IRRCi study:

The number of controlled companies has increased over the last decade. In 2002, there were 87 of these firms in the S&P 1500 composite; currently, there are 114. Of these, 79 feature multi-class capital structures with unequal voting rights and 35 are controlled firms with a single class of voting stock.   

Non-controlled firms outperformed controlled firms over the 3-year, 5-year and 10-year periods ended Aug. 31, 2012. Controlled companies featuring multi-share classes only outperformed over the shortest time period measured —one year —and materially underperformed over longer periods of time. By contrast, control companies with a single share class outperformed all others over longer time periods. The nature of the control mechanism appears to matter.

Controlled companies with multi-class structures consistently exhibit more share price volatility than non-controlled companies. Controlled companies with a single class of shareholders, however, do consistently exhibit more share price stability.

Although institutional investors cite concerns with investing in controlled companies, they generally do not have formal policies concerning such firms.

Investors report that controlled firms are less responsive to their inquiries and engage in less outreach than non-controlled firms.

Controlled firms with a single class of stock have more conventional governance features with respect to board accountability and shareholder rights compared to controlled firms with multi-class capital structures.

IRRCi and ISS will host a webinar to review the findings on Monday, Oct. 8, at 2 p.m. (EDT).

Ann Yerger, CII's executive director describes the same-day announcements made by her organization and IRRCi as “serendipity.”

“It was quite coincidental,” she says. "We're not used to the stars aligning like this."

She said CII has been working on the initiative since early summer. Although the timing of the two anouncements were not coordinated, she was aware that IRRCi's research was underway and had the potential to bolster the case her organization was making.

Yerger says the increase in the number of IPOs including dual- or multi-class structures as they go to market has been a “wake-up call” and “reinforced that it was time to nip this in the bud.” She is hopeful that the exchanges will invite CII to engage in detailed discussions regarding their proposal and will agree to submit a rule change request to the Securities and Exchange Commission. For now, however, “the ball is in their court.”

“We are not suggesting that companies shouldn't go public,” Yerger says. “We just want them to have a capital structure that we think is in the best long-term interest of investors in the marketplace. We think that is ‘one share, one vote.'”