Investors should examine the Company's ownership structure to determine whether it has different classes of common shares that separate the voting rights of those shares from their economic value.

The management team and the Board should act in the best interests of all Shareowners. However, if a Company has two classes of common shares (dual classes of common equity):

• Class A Shareowners have all the voting rights.
• Class B Shareowners don't have any voting rights.

then the management team and the Board are more likely to focus on the interests of Class A Shareowners. The rights of Class B Shareowners may suffer as a consequence of the ownership structure.

The Company's ability to raise equity capital for future investment may also be impaired, as it's difficult to sell unattractive Class B shares to investors. To finance future growth the Company may need to raise debt capital and increase leverage.

If you are reviewing the Company, you should consider:

• Does the Company have safeguards in its articles of organization or bylaws that protected the rights and interests of Class B shareowners?
• If the Company was recently privatized by the government, has the government retained voting rights that could veto certain decisions of management and the Board? If so, this situation could hurt other Shareowners.
• Have the super-voting rights of Class A Shareowners impaired the Company's ability to raise equity capital?

Practice Question 1

True or False? Company A has two classes of shares: preferred shares and common shares. Preferred shareholders don't have any voting rights. The ownership structure of this company indicates a weak corporate governance practice.

Correct Answer: False

Preferred stock does not usually have voting rights. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation. Concerns about ownership structure refer to issues regarding common shares.