In mid-2005 few investors in Porsche would have guessed that only 18 months later their firm would be the dominant shareholder in Volkswagen. Then again, it is none of their business, because they have little say over the sports-car maker’s managers or strategy. The Porsche and Piëch families have total voting control over the German firm, despite owning only half of its equity. The publicly traded shares, providing the other half of Porsche’s capital, have no right to vote.
After a recent European ruling, the “VW law”, which prevents any shareholder from exercising more than 20 percent of the carmaker’s votes, is likely to be repealed. If so, the Porsche and Piëch clans will have control of VW, because Porsche holds 27.4 percent of the voting shares. In shareholder democracies, as in political ones, poor turnouts mean that about one-third of the votes can grant control of a company.
That is not the full extent of the families’ influence. VW has a 20 percent stake in Scania, a Swedish truck and engineering group, which has two classes of voting shares, one with ten times as many votes as the other. Thanks to these super-voting shares, VW has 35.3 percent of the votes in Scania. In other words, the Porsche and Piëch families will also control Scania, thanks to an economic stake in the firm of a mere 2 percent.
Almost since the first company listed on the first public market, capitalists have sought to raise money without sacrificing control. Porsche demonstrates two techniques that families and founder-entrepreneurs commonly use. First is a cascade of companies — a ploy particularly favoured by Italians — to gain control of a larger group. Each stage of the cascade amplifies the capital governed by the tiny company at the top. The second, on flotation, is to issue shares to the public with vastly inferior — or no — voting rights. Both are legal.
Porsche is an extreme example of how a family can wield great power by harnessing large amounts of other people’s money. But it is not unusual. An American study concluded that 6 percent by number and 8 percent by capitalisation of quoted companies in America had dual-class shares in 2002. Only two-thirds of large European companies rigorously apply the principle that one share should command one vote, according to a Belgian study in 2005.
The European Commission, eager to create an open market for corporate control, is studying whether it should act against them. Israel stands out for having made the even allocation of votes a requirement of listing on the stock exchange. It is a tricky balance to strike. Liberalism argues that investors and owners should be free to enter into contracts as they wish. On the other hand, sheltering families that govern a company badly impedes restructuring. Isn’t that bad economics?
Sweden is the European country with the most dual-class shares: some two-thirds of its listed companies have them. The Wallenbergs, one of Sweden’s most famous business families, which controlled Scania before selling most of their stake to VW, could give a master-class in their use. Their foundations own super-voting shares in Investor, a quoted investment company that they control. Then there is another layer of special shares. Investor has helped develop Swedish companies such as Electrolux, a white-goods maker, and Ericsson, a telecoms-equipment company. Most of these firms have shares with disproportionate voting rights, a slug of which Investor owns.