Shopify and the Problem of Shareholder “Approval” at Multi-Class Companies

Media reporting can make proxy season seem more dramatic than it is. While breathless coverage of board strife, impossibly high executive pay figures and shareholder activism at well-known companies is the norm, the overwhelming majority of director election and executive compensation proposals pass with majorities of 90% and upwards.

The handful of proposals that fail understandably draw headlines – yet many proposals opposed by a majority of shareholders fly under the radar. That’s because (with some notable exceptions) most reporting fails to acknowledge how multi-class share structures, which give certain shares typically held by founders and insiders more voting power than those held by institutional and retail investors, obscure investor sentiment.

Proxy voting is highly technical in and of itself, and its ultimate influence on how companies are run is even more complicated. So why does the impact of multi-class share structures matter? Because giving insiders and founders disproportionate voting power often serves to effectively silence ordinary shareholders, threatens the agency and objectivity of the board and removes a key safeguard against excessive pay, related party transactions, and other potential misuses of investor capital.

In this post, we look at how inequitable voting rights influenced 2024 AGM results at Shopify, and at the broader impact of multi-class share structures on the board and its role.

Case Study: Shopify Inc.

Two years ago, Shopify controversially implemented a “founder share” that gave CEO Tobi Lutke 40% voting rights indefinitely, even if his actual economic stake in the company goes down as low as ~2%. A majority of the company’s shares were voted against this arrangement – but because not all of the company’s shares had the same voting power, the founder share was nonetheless granted to Lutke.

At the 2024 AGM, Shopify’s now-cemented triple-class share structure again swung the vote on several proposals. Yet, as in 2022, most media coverage of the general meeting painted an incomplete picture of the results. A Financial Post headline on the day of the meeting read “Shopify shareholders approve executive pay plan they were urged to reject” while thelogic.co reported “Shopify shareholders approve executive pay plan, rejecting proxy push.” Shopify’s subsequent filings announced that all agenda items had been approved.

Like two years ago, the word “approve” is doing a lot of lifting.

According to S&P Capital IQ, institutional investors currently hold 815,336,783 shares in Shopify, or 63.3% of the economic exposure to the company’s share price performance. This translates into roughly 40% voting power, equivalent to that of the founder-CEO who only holds 6.2% of company’s total outstanding equity.

If the multi-class structure were collapsed and all shares voted on a one-to-one basis, the results indicate that well under half of shareholders supported the pay proposals, with support ranging from 34% for the option plan to 45% for the advisory say on pay. Meanwhile, we calculate that the re-election of director Gail Goodman would only have received 57% support.

[…]

Impact on Transparency

It’s notable that we had to perform the above calculations to untangle vote results ourselves. Even proponents of multi-class share structures, like the Institute for Governance of Private and Public Organizations (“IGOPP”) in Canada (see “Policy Paper No. 11: The Case for Dual-Class of Shares”, 2019), call for companies to disclose a breakdown of their voting results so that shareholders can more easily isolate the effect of the superior voting shares. The failure to provide such disclosure indicates that companies see value in opacity, and that directors who effectively owe their seat to the grace of the CEO are not in a position to extract even modest concessions.

Read more