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Controlled Companies in the Standard & Poor’s 1500

A Follow-up Review of Performance & Risk

By: Edward Kamonjoh March 2016

Controlled Companies in the Standard & Poor’s 1500: A Follow-up Review of Performance & Risk

March 2016 | of 90

The analysis, opinions and perspectives herein are the sole responsibility of the author. The copyright for this report is held by the IRRC Institute. The material in this report may be reproduced and distributed without advanced permission, but only if attributed. If reproduced substantially or entirely, it should include all copyright and trademark notices.

© Copyright 2016, Investor Responsibility Research Center Institute (IRRCi)

For more information, please contact: Jon Lukomnik, Executive Director

Investor Responsibility Research Center Institute (IRRCi)

40 Wall Street, 28th Floor

New York, New York, 10005

T: (+1) 646-512-5807

[email protected]

www.irrcinstitute.org

Report Author: Edward Kamonjoh, Head, U.S. Strategic Research and Analysis

Institutional Shareholder Services (ISS)

702 King Farm Boulevard, Suite 400

Rockville, MD, 20850

T: (+1) 301-556-0392

[email protected]

www.issgovernance.com

The author would like to thank the following individuals for their support and contributions; Patrick McGurn, Jon Lukomnik, Sudha Sukumaran, Fortune Niama, Mohammed Abdi, Tim Matthews, Fredo Velasquez, Sean Quinn, Carol Bowie, Subodh Mishra, Robert Yates, Daniel Radakovich, Steve Silberglied, Andrew Borek, Andrew Maletz, Sydney Carlock, Marc Goldstein, Martin Wennerström, Orsolya d'Alboy, Alberto Bagnara, Kevin de Pril, Shinbo Won, Taketoshi Yoshikawa, Thomas von Oehsen, Robbert Gerritsen, Kiko Sanchez, Dada Veloso-Beltran, Jeff Leathers and Joseph Corwin.

mailto:[email protected]

http://www.irrcinstitute.org/

mailto:[email protected]

http://www.issgovernance.com/


March 2016 | of 90

Contents

Executive Summary .................................................................................................... 4

The Universe of Controlled Firms .............................................................................. 15

Control Mechanisms .................................................................................................. 15

Controlled Companies by Sector, Industry and Revenue ........................................... 17

Vintage Year ............................................................................................................... 21

Frequency and Growth of Controlled Firms ............................................................... 23

Performance and Risk ................................................................................................ 24

Comparison of Governance Features ......................................................................... 43

Alignment between Controlling and Unaffiliated Shareholders ................................ 71

Institutional Shareholder Views ............................................................................... 73

Recent Trends .......................................................................................................... 76

Efforts to Create/Eliminate Controlling Mechanisms ................................................. 79

Controlled Companies: A Review of Global Trends/Characteristics ............................ 80

Conclusion ............................................................................................................... 82

Study Methodology ................................................................................................. 82

Appendix: Controlled Firms in the S&P 1500 Composite Index .................................. 84


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Executive Summary

All controlled companies are not created equal. At some companies, founders and their

families, or other large investors simply own large blocks of their companies’ sole class

of voting stock. At these firms, voting power remains directly proportionate to the

investor’s at-risk capital. More often, controlling shareholders use multi-class capital

structures to concentrate voting power without commensurate capital commitments or

risk of loss. Supporters of these multi-class structures argue that control of a firm's

voting power enables management teams to minimize the impact of short-term market

pressure, so as to focus on long-term business prospects. They promise higher returns

over time in exchange for public shareholders’ loss of control.

Should questionable practices arise at controlled companies, the two main protections

available to shareholders are caveat emptor and the so-called Wall Street Rule—sell

your shares if you do not like the way the company is managed. Unlike many global

markets, the U.S. — at the state, stock market and federal levels—provides limited

protection to minority shareholders. The major U.S. stock exchanges, for example, relax

their basic governance listing requirements for “controlled companies.” As a result,

governance provisions which provide safeguards for external shareholders, such as a

majority of independent directors on their boards or independent nominating panels do

not apply to controlled companies. At least partially as a result of this reduced level of

accountability to external company shareholders, controlled companies attract

disproportionate attention when questionable practices arise.

Some controlled companies function as benevolent dictatorships. The controlling

investors’ high degree of alignment with other shareholders drives value creation, while

control allows for innovation and speedy decision-making. Some regard Berkshire

Hathaway through this lens. Boards at a number of these firms comply with their listing

stock market’s independence rules despite legally being exempt from these

requirements.

At other controlled firms, however, the adage about the corrupting qualities of absolute

power rings true. At these companies, self-dealing, poor strategic planning, and other

risky behaviors destroy value.

While it is convenient to assign white or black hats to controlled companies, such a view

is overly simplistic. In practice, controlled companies generally exhibit both the same

types of behaviors—good and bad—as other public firms. When poor practices arise at

controlled companies, however, basic oversight mechanisms (such as proxy contests


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and unsolicited offers) often prove ineffective and meaningful changes in corporate

culture are difficult to achieve. As a result, the media narrative for these controlled firms

lurches back-and-forth between behavioral extremes like a corporate version of the

fictional Dr. Jekyll and Mr. Hyde.

The issue of corporate control structures received

renewed attention in the wake of the initial public

offering of Google (now renamed Alphabet) in 2004.

Citing Berkshire Hathaway as their role model, Google’s

founding duo issued a “founder’s” letter, an owner’s

manual of sorts for shareholders, modelled after

Warren Buffett’s letter to Berkshire’s investors, which

justified a controlling dual-class stock structure.

A corporate conga line of social media and internet concerns—including LinkedIn Corp.,

Zynga Inc., Groupon Inc., and Facebook Inc.—soon followed in lockstep.

In response to this wave of multi-class stock issuances, ISS conducted an analysis of

Controlled Companies for the IRRC Institute (IRRCi) in 2012. This predecessor report

focused on the long-term performance and risk profiles of controlled companies in the

S&P 1500 universe.

While it is convenient to assign white or black hats to controlled companies, such a view is overly simplistic.


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Key findings of the original 2012 study included:

The issue of dual-class controlled corporations continues to be topical. Alibaba made

global headlines in the fall of 2013 when it shopped for a stock market that would allow

it to adopt a controlled company structure. Hong Kong refused to lift its restrictions on

dual-class capital structures, so company founder Jack Ma opted to list on the New York

Stock Exchange (NYSE), which had long ago declined to support a mandatory one-share,

one-vote standard. T. Rowe Price, a prominent investment manager with over $700

billion in assets under management, recently signaled plans to vote against board chairs

(or lead independent directors) and members of the Nominating and Governance

Committees at U.S. firms controlled by way of multi-class stock with unequal voting

2012 2002

The number of controlled companies increased from 2002-2012

2012

2002

TOTAL SHAREHOLDER

RETURN

Non-controlled firms outperformed controlled firms over the 10-year study period in terms of total shareholder return (TSR)

A HIGHER OCCURRENCE of accounting-related material weaknesses and related-party transactions than non-controlled companies

CONTROLLED COMPANIES HAD

Controlled companies with multi-class structures consistently exhibited

than non-controlled companies

MORE SHARE PRICE

VOLATILITY

The governance provisions of controlled firms with a single class of stock differed from those with multi-class capital structures and in some respects more closely resembled those of non-controlled firms.

Governance Provisions

Controlled Single-class Structure

Controlled Multi-class Structure

Uncontrolled


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rights following concerns around the proliferation of IPOs with dual-class capital

structures. A recent study by law firm Morrison Foerster of 580 “emerging growth

companies” that had their IPOs between Jan. 1, 2013 and Dec. 31, 2015 found that 99

(17 percent) qualified as “controlled” and 87 (15 percent) had multiple classes of stock

at the time of their public offerings. ISS’ examination of recent IPO activity found that

IPOs of companies with multiple classes of voting stock has increased in absolute

numbers but declined in percentage terms over the study period and that the size of

these offerings has soared and, as such, investors’ market exposure to their potential

risks appears to be rising.

This new report and expands the scope of the original study (2012) to include additional

comparative dimensions around controlled companies in the S&P 1500 index.

The key findings of this sequel study (2016) include:

Controlled Company Prevalence Drops

Contrary to the findings of the 2012 study, the number of controlled firms in the S&P

1500 fell by approximately 8 percent from 2012 to 2015.

Contrary to the findings of the 2012 study Controlled Company prevalence

in 3 years

DROPS

approximately


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Controlled Companies Congregate in Three Sectors

Nearly 70 percent of all controlled companies cluster in three sectors: Consumer

Discretionary (40 percent), Industrials (16.2 percent) and Consumer Staples (12.4

percent).

Control Type Influences Control Longevity

The oldest controlled companies have multi-class capital structures in place. The

average age of such firms is more than double that at controlled firms with a single

class of stock. Conversely, single-class stock controlled companies tend to have limited

shelf-lives – over one-half of such firms became controlled after the year 2000,

compared with less than one-fifth of multi-class stock controlled firms.

Controlled Companies Congregate in Three Sectors

Consumer Discretionary 40%

Nearly 70 percent of all controlled companies cluster within these sectors:

Industrials 16.2%

Consumer Staples 12.4%

The Oldest Controlled Companies Have Multi-class Capital Structures in Place

A

B

C


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Controlled Company Size Grows

The average and median market capitalization for the study’s universe of controlled

firms just about doubled over the period of study. The average market capitalization of

controlled firms jumped from $8.3 billion in 2005 to $20.6 billion in 2015 and the

median market capitalization increased from $1.45 billion in 2005 to $2.8 billion in

2015. Part of this growth, however, simply reflects broader market trends. The average

capitalization for all constituents of the S&P 1500 index in 2005 was $9.4 billion and the

median capitalization was $2.1 billion. By 2015, the average capitalization was $14.3

billion (1.5 times that in 2005) and median capitalization was $3.2 billion (also 1.5 times

that in 2005). The evidence suggests that the market capitalization growth rate of

controlled firms was higher than that of the broader market index.

Controlled Company Size Grows

The average and median

over the study period

MARKET CAPITALIZATION

for the study’s universe of controlled firms just about

DOUBLED

2005 2015

Controlled Companies Generally Underperform on Metrics That Affect Unaffiliated Shareholders

Revenue Growth

Total Shareholder Return

Dividend Payouts

Return on Equity


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Controlled Companies Generally Underperform on Metrics That Affect Unaffiliated

Shareholders

Controlled companies underperformed non-controlled firms over all periods reviewed

(one-, three-, five- and 10-year periods) with respect to total shareholder returns,

revenue growth, return on equity, and dividend payout ratios. However, controlled

companies outperformed non-controlled firms with respect to return on assets. Results

for returns on invested capital were mixed: controlled companies outperformed

marginally (by less than a percentage point) for most time periods, but underperformed

over the 10-year period. EBITDA growth at controlled firms outperformed non-

controlled company growth rates for the five- and 10-year periods, while non-controlled

firms outperformed over the shorter time frames. Balance sheet metrics were also

mixed.

No Consistent Difference in Stock Price Volatility Separates Controlled and Non-

Controlled Companies

Average volatility at controlled firms is higher than that at non-controlled companies

over the one-year and 10-year periods, and lower than that at non-controlled firms

over three-year and five-year periods. Controlled firms with single-class stock

structures generally have lower average volatility than both non-controlled firms and

controlled companies with multiple classes of stock in all periods reviewed with the

exception of the 10-year period.

Single-Class Stock Controlled Firm Governance Resembles Non-Controlled Firms

Board and key committee independence levels, the prevalence of annually elected

boards and majority vote standards for director elections, the frequency of

supermajority vote requirements, and the thresholds for shareholders’ right to call a

special meeting at controlled firms with single-class capital structures all continue to

resemble those at non-controlled firms more so than at controlled multi-class stock

firms.

Related Party Dealings Continue at Controlled Companies

The frequency of related-party transactions (RPTs) at controlled firms declined over

the study period but RPT size continues to exceed that at non-controlled firms. The

average magnitude of controlled company RPTs is now $245.7 million or five times

greater than at non-controlled firms – a significant increase relative to the almost

identical average RPT values (of approximately $10 million) between controlled and

non-controlled companies identified in the 2012 study. The size of the RPTs is affected

primarily by several large related party transactions at Century Aluminum and Reynolds


March 2016 | of 90

American. If the RPTs at these two companies are disregarded, the average value of

RPTs at controlled firms falls to $4.2 million. No controlled firms with material

weaknesses were identified in this updated study compared with almost 4 percent of

controlled firms in the 2012 study.

Longer Director Tenures and Less Frequent Board Refreshment Occur at Controlled

Firms

Board tenures are generally lengthier at controlled companies compared with non-

controlled firms and the rate of board seat refreshment at controlled entities is lower

than at non-controlled companies. The proportion of controlled firms where board

members average at least 15 years of board service is more than 17 percentage points

higher than at non-controlled firms. Almost 80 percent of controlled firms have no new

nominees on their board – roughly 10 percentage points higher than at non-controlled

companies.

Controlled Firms have

Longer Director Tenures

Controlled No new

directors Non-Controlled

Controlled Non-Controlled

& Less Frequent Board Refreshment


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Diversity Deficit Found in Controlled Firms’ Boardrooms

Women and minority directors are less common at controlled companies compared

with non-controlled firms. The proportion of controlled firms with no female

representation on their boards is almost 4 percentage points higher than at non-

controlled firms, and the percentage of firms with two women on the board is almost 7

percentage points lower. The prevalence of controlled firms with no minority

representation on the board is 20 percentage points higher than at non-controlled

companies, and the proportion of firms with two minorities on the board is lower by

almost 11 percentage points.

Diversity Deficit Found in Controlled Firms’ Boardrooms

Women and minority directors are less common at controlled companies compared with non-controlled firms.

Fewer Financial Experts Serve on Controlled Firms’ Boards

A lower proportion of board members have financial expertise at controlled companies compared with non-controlled firms.


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Fewer Financial Experts Serve on Controlled Firms’ Boards

A lower proportion of board members have financial expertise at controlled

companies compared with non-controlled firms. The proportion of controlled firms

with less than ten percent of directors with financial expertise on the board is almost 5

percentage points higher than at non-controlled firms. The percentage of controlled

firms with at least 30 percent of financial experts on the board is more than 9

percentage points lower.

Controlled Companies with Multi-class Stock Structures Award Significantly Higher

Average CEO Pay

Most-recent-fiscal-year average CEO pay at these firms outstrips that at both non-

controlled companies and controlled entities with a single class of stock.

› Average chief executive pay at controlled companies with a multi-class capital

structure is three times higher (by some $7.2 million) than that at single-class stock

controlled firms and is more than 40 percent ($3.3 million) higher than average CEO

pay at non-controlled firms. This pay gap is largely attributable to high pay at media

firms.

› Including single-class controlled companies, average CEO pay at controlled firms is

19 percent ($1.5 million) higher than that at non-controlled firms. Controlled firms

with a single class of stock actually pay their CEOs less than half the broader market

average (some $3.9 million less).

Controlled Companies with Multi-class Stock Structures Award Significantly Higher Average CEO Pay

Single-Class Stock Controlled

Multi-Class Stock Controlled

Non-Controlled


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› Much of the pay differential between controlled and non-controlled firms is driven

by the pay disparities at larger companies. The average CEO pay package at

controlled S&P 500 large-cap firms surpasses that at non-controlled firms by $6.9

million and at controlled multi-class stock large-cap firms, average CEO pay exceeds

that at controlled companies with a single stock class by $16.2 million and that at

non-controlled firms by $9.5 million. By contrast, average CEO pay at multi-class

stock controlled companies does not exceed that at both controlled single-class

stock firms and non-controlled companies in the S&P 400 mid-cap index by more

than $1.9 million and $74,000, respectively. In the S&P 600 small-cap index, average

CEO pay at multi-class stock controlled companies does not exceed that at both

single-class stock controlled firms and non-controlled companies by more than $1.1

million and $39,000, respectively.

› On the other hand, median CEO pay at all controlled companies, including both

single- and multi-class stock controlled firms, is lower than that at non-controlled

companies by $1.21 million. Median CEO pay at non-controlled firms exceeds that

at multi-class stock controlled companies by $1.16 million, and exceeds that at

single-class stock controlled firms by $2.1 million.


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The Universe of Controlled Firms

Control Mechanisms

Contrary to common belief, the number of controlled companies has declined recently,

from 114 in the 2012 study to 105 in this updated study (as of October 25, 2015).

Overall, 7 percent of the constituents of the S&P 1500 index are controlled firms.

Most of this decrease in controlled companies reflects the disappearance of single-class

controlled firms. As with the original study company universe, there are two primary

control mechanisms in the updated study group: 1) multi-class capital structures with

unequal voting rights (78 study companies); and 2) control through ownership of at

least 30 percent of a class of single-vote stock by a person or group (27 firms). The mix

of control mechanisms has shifted slightly since the 2012 study when 79 firms had

multi-class capital structures and 35 single-class stock firms had controlling

shareholders.

Control mechanisms vary. Of the controlled companies in this study, 40 percent provide

enhanced or exclusive board election rights to controlling shareholders, 35 percent

utilize multi-class capital structures with super-voting shares, and 25 percent are

dominated by a significant shareholder (or shareholder group) who owns a large portion

of the company’s single-vote stock.

Multi-class Capital Structures

Multi-class capital structures with unequal voting rights permit control of a firm through

one or more classes of stock that entitle their holder(s) to enhanced voting rights

relative to their economic ownership. While these mechanisms take many forms, the

two most common are super-voting shares and class voting in director elections. Super-

voting shares carry more votes per share than other classes of voting stock (or entitle

holders of a class to a fixed percentage of the total vote). Class-voting allows holders of

one stock class exclusively to elect a fixed number or percentage (usually a majority) of

board members. (Note: Firms that employ both of these features in their capital

structures and those whose outside shareholders hold mostly non-voting shares are

categorized in the latter group.)


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Super-Sized Voting Rights

Thirty-seven of the controlled companies in this updated study (up from 34 in the 2012

study) maintain control via multi-class capital structures that include at least one class

of super-voting shares but do not provide any preference to elect a certain number or

percentage of board members. Over 90 percent of these firms have two classes of

stock, including one class of super-voting shares. Two companies, Seneca Foods Corp.

and Universal Health Services, Inc., have five classes and four classes of stock,

respectively, and four firms, Central Garden & Pet Company, Comcast Corporation,

Lamar Advertising, and Telephone and Data Systems Inc. have three classes of stock. In

most cases, super-voting shares entitle their holder to 10 votes per share compared

with one vote for other classes. At a handful of firms, the number of votes attached to

each share of super-voting stock is adjusted by a formula to reflect insiders' right to cast

a certain percentage of the total vote. Some firms restrict ownership of super-voting

shares to company insiders or require that such shares convert to common stock upon

transfer to a non-controlling party.

Most companies’ super-voting share capital structures were adopted prior to their

initial public offerings. Notable exceptions are Berkshire Hathaway and Urstadt Biddle

Properties Inc., which created new classes of common stock in 1996 and 1998,

respectively. These firms' founders had held considerable ownership stakes in their

respective companies at the time of the creation of these new classes of stock.

The controlling shareholders at these firms are generally company founders, their

relatives, and/or their descendants. Notably, structural defenses such as supermajority

vote requirements often provide these large shareholders with effective veto power

over unsolicited transactions or changes to key governance policies.

Enhanced or Exclusive Director Election Rights

At 41 firms in the controlled-company study group (down from 45 firms in 2012),

holders of at least one class of stock are entitled to elect a fixed number or percentage

of board members. Voting mechanisms at these firms vary. At some firms, holders of

each class of stock vote separately for director nominees, while at others, holders of all

classes vote together on certain nominees but not others. Over one third of the firms in

this category have classes of non-voting shares including some where the non-voting

stock constitutes a majority of the aggregate number of shares outstanding. Some

companies have classes of stock with both super-voting shares and the exclusive right to


March 2016 | of 90

elect a majority of the board, whereas other companies have classes of stock with

limited voting rights, where, for example, outside shareholders are entitled to elect a

minority of directors but may not vote on any other items. Yet other corporations have

insider-held shares with no public market for any class of stock other than non-voting

shares. Non-affiliated shareholders of these firms are effectively relegated to the status

of silent partners, in practice, if not in legal structure.

Firms in this group share many characteristics with those with super-voting shares.

Most are controlled by founders, their families, and/or their offspring, and the control

mechanisms generally date back to each firm's IPO or spinoff from a parent company.

Only International Speedway Corp. created such a structure following its IPO.

Firms with Single Class Capital Structures

Maintaining control via ownership of large blocks of single-vote shares is less common.

Twenty-seven companies in the study universe (down from 35 in the 2012 study) have a

single class of common stock and a control party owning at least 30 percent of the

outstanding shares. In addition to owning large economic interests, some controlling

shareholders are entitled, under certain agreements, to designate a minority of the

board members. Firms in this category have fewer controlling shareholders who are

founders or members of a founder's family, and controlling parties may include non-

executive investors, including those who may have acquired a controlling stake

subsequent to a firm's IPO or those who may have been formerly affiliated with the firm

and retained a significant ownership interest. Companies in this class may not always

maintain continuous control, as controlling ownership interests can fluctuate over time.

(The Wendy’s Company was included in this category given that while directors

affiliated with board chair/ex-CEO Nelson Peltz’s entities control less than 30 percent of

the firm’s voting power (24 percent), 40 percent of the board is comprised of directors

with ties to Peltz’s entities.)

Controlled Companies by Sector, Industry and Revenue

Sector

Controlled companies cluster in a handful of sectors (2-digit GICS code) and industry

groups (4-digit GICS code).


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Three sectors account for nearly 70 percent of all controlled companies – the Consumer

Discretionary sector with 40 percent, the Industrials sector with 16.2 percent, and the

Consumer Staples sector with 12.4 percent. To put these observations into perspective,

the Consumer Discretionary sector represents just 16 percent of the entire S&P 1500

index, the Industrials sector accounts for about 15 percent of S&P 1500 firms, and the

Consumer Staples sector is the home to 4.7 percent of index firms at the time this study

was conducted. Comparatively, these three sectors are marginally more dominant in

terms of concentration of controlled corporations compared with 2012, when the

predecessor study found that they accounted for 37.8 percent, 16.7 percent, and 11.4

percent of controlled companies, respectively.

In sharp contrast, controlled companies remain relatively scarce in capital-intensive

industries such as the Materials and Telecommunication Services sectors, which have

three and one controlled firms, respectively (versus five and three firms respectively in

2012), and the Energy and Utilities sectors, each of which have one controlled entity.

FIGURE 1: CONTROLLED COMPANIES BY SECTOR

As of 10/25/15

Sector # of

Controlled Firms

% of Controlled Firms

# Firms in Sector

% of Sector Controlled

Consumer Discretionary 42 40.0% 236 17.8%

Industrials 17 16.2% 224 7.6%

Consumer Staples 13 12.4% 70 18.6%

Financials 13 12.4% 304 4.3%

Information Technology 11 10.5% 240 4.6%

Health Care 3 2.9% 160 1.9%

Materials 3 2.9% 98 3.1%

Energy 1 0.95% 94 1.1%

Telecommunication Services

1 0.95% 14 7.1%

Utilities 1 0.95% 60 1.7%

Totals 105 1500 7.0%

Industry

While controlled companies are found in 23 of the 24 industry groups represented in

the S&P 1500 index, they concentrate in a handful of them. (Note: This tally adds one

Source: ISS QuickScore Database


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additional industry group —Utilities— to the mix seen in the 2012 Controlled Company

study.) More than half of the controlled companies appear in five industry sectors:

Media (15), Retailing (13), Capital Goods (10), Food, Beverage & Tobacco (10), and

Consumer Durables & Apparel (7). Only the Banking industry has no controlled

companies, unchanged from 2012.

In addition to housing the highest number of controlled companies, the Media industry

also boasts the highest concentration (53.6 percent) of controlled companies in the

study group. Within the universe of controlled firms, in only one other industry group

does the percentage of controlled companies exceed 20 percent: 22.2 percent of the

constituents of the Food, Beverage, and Tobacco industry are controlled. While less

than 10 percent of the Capital Goods industry is controlled, this relatively large industry

has the highest proportion of controlled firms (9.2 percent) amongst constituents of the

S&P 1500 index.

Controlled companies are not evenly distributed within sectors. Within the Consumer

Discretionary sector, for example, 15 Media companies are controlled, while only one

(Ford Motor Company) in the Automobiles & Components group is controlled. Similarly,

within the Consumer Staples sector, 10, or more than one-fifth of study companies in

the Food, Beverage, & Tobacco group are controlled compared with just one firm (Wal-

Mart Stores) in the Food & Staples Retailing industry.

In certain industry groups, there are patterns with respect to preferred control

mechanisms. Controlled media firms overwhelmingly (13 of 15) have capital structures

that enable insiders to elect a majority of the board. In fact, the industry represents

almost one-third (31 percent) of all firms with preferential director election rights.

Revenue

On average, the revenues at controlled companies are higher than at non-controlled

companies over the 10-year study period. Average revenues at single-class stock firms

with a controlling shareholder are just about double those with multi-class stock

structures and outstrip non-controlled firm average revenues by at least $10 billion in

each of the one-, three- five- and 10-year periods examined. At single-class stock

companies, average revenues are skewed by Wal-Mart’s revenues which have averaged

at least $400 billion over the 10-year study period. When Wal-Mart’s outlier revenues

are excluded from the average calculations, controlled firms with a single class of stock

have the lowest average revenues of all firm types. Further, excluding Wal-Mart’s


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revenues from the universe of all controlled firms and Exxon Mobil’s revenues from the

set of non-controlled firms (Exxon’s revenues averaged at least $360 billion over the 10-

year study period) shows that controlled firms have higher average revenues than non-

controlled firms in the one- and three-year periods, but lower average revenues than

non-controlled companies in the five- and 10-year study periods, and that multi-class

stock controlled firms boast the highest average revenues across all periods reviewed,

largely due to high revenue numbers at Berkshire Hathaway and Ford Motor Co.

FIGURE 2-A: AVERAGE REVENUE BY CONTROL TYPE (MILLIONS)

As of Fiscal Year End(s) on 12/14/15

Source: Compustat

$8

,33

1.8

$8

,06

5.2

$7

,80

6.6

$7

,16

2.5

$1

2,9

37

.4

$1

2,3

80

.1

$1

1,7

33

.9

$1

0,5

63

.9

$1

0,4

62

.2

$9

,85

1.6

$9

,19

9.8

$8

,22

8.2

$2

0,0

87

.9

$1

9,6

84

.6

$1

9,0

54

.4

$1

7,3

11

.3

1 - Y R A V G . 3 - Y R A V G . 5 - Y R A V G . 1 0 - Y R A V G .

Non-Controlled Controlled

Controlled: Multi-class Structure Controlled: Single-class Structure


March 2016 | of 90

FIGURE 2-B: AVERAGE REVENUE BY CONTROL TYPE – OUTLIERS EXCLUDED (MILLIONS)


Vintage Year

As with wine, age matters when it comes to controlled companies. For the purposes of

this study, the "vintage year" of a company is defined as the year in which the current

control mechanism was established or the IPO year. Vintage years are determined using

public company filings on the Securities and Exchange Commission’s (SEC) EDGAR

website, company websites, share trading information, and conversations with

company representatives. For controlled companies that do not disclose when control

was established, the vintage year defaults to the company's IPO year.

Controlled company structures, especially those with multi-class capital structures, are

built to last. The average "vintage age" of controlled companies in the study group is

approximately 27 years (that is three years longer than the typical lifespan in the 2012

study). Most controlled companies (84.8 percent) have been controlled for as long as

they have been publicly traded. That said, a 24 percentage point difference exists

between the proportion of multi-class stock controlled companies that have the same

IPO and vintage year (91 percent) and that of single-class stock firms with a controlling

shareholder (66.7 percent).

$8

,07

5.9

$7

,78

9.7

$7

,53

2.2

$6

,90

3.9$8

,41

2.5

$7

,93

1.8

$7

,44

2.9

$6

,69

1.4

$1

0,4

62

.2

$9

,85

1.6

$9

,19

9.8

$8

,22

8.2

$2

,26

3.6

$2

,17

2.3

$2

,17

2.1

$2

,08

0.7


REVENUE - EXC. OUTLIERS



Source: Compustat


March 2016 | of 90

Control mechanisms appear to have an impact on longevity. On average, the age of

controlled firms with multi-class capital structures (31 years) is more than double the

age (15 years) of firms with a single class of shares and a controlling party. In fact, more

than one-half of multi-class controlled firms have vintage years occurring before 1990.

The oldest controlled companies generally have multi-class capital structures in place.

Only controlled firms with multiple classes of stock have vintage years dating back prior

to 1960. In contrast, just 14.8 percent of controlled firms with a single-class stock

structure have vintage years before 1990.

Controlled companies with a single class of stock have limited shelf lives. More than 50

percent of the single-class stock controlled companies in the study universe have

vintage years occurring after the year 2000. While the proportion of single-class stock

controlled firms with vintage years in the 1990s is comparable to that of multi-class

stock controlled firms, it outstrips that of multi-class controlled firms by 8 percentage

points in the 2000s, and by more than 28 percentage points for post-2010 vintage years.

FIGURE 3: VINTAGE DECADE BY CONTROL TYPE

As of 10/25/15

Well-established brands dominate the list of the oldest controlled companies. Ford

Motor’s control structure boasts the longest lifespan (59 years). The founding Walton

family has managed to maintain effective control at Wal-Mart Stores for 45 years. Some

6.7

%

18

.1%

17

.1%

29

.5%

16

.2%

12

.4%

9%

21

.8%

20

.5%

29

.5%

14

.1%

5.1

%

0%

7.4

%

7.4

%

29

.6%

22

.2%

33

.3%

1 9 5 0 s & P r i o r 1 9 6 0 s & 1 9 7 0 s

1 9 8 0 s 1 9 9 0 s 2 0 0 0 s 2 0 1 0 s

% C

ON

TRO

LLED

FIR

MS

Chart Title

Controlled Controlled: Multi-class Structure Controlled: Single-class Structure



March 2016 | of 90

long-surviving names, however, are far from the household variety. Healthcare firm Bio-

Rad Labs, for example, has a 49-year shelf-life.

On a sector basis, controlled companies in the Consumer Staples sector have the oldest

average age (42), and, within that sector, firms in the Food, Beverage, & Tobacco

industry have the highest average vintage age (45 years). Other sectors with long-

standing average vintages include the Materials sector (39 years) and the

Telecommunications Services sector (34 years). The Consumer Discretionary sector,

which has the highest proportion of controlled firms (40 percent) has an average

vintage age of 24 years.

Frequency and Growth of Controlled Firms

Recent turnover in the ranks of controlled companies is surprisingly high. Only 38

percent of firms in the S&P 1500 that were controlled in 2005 remained in the index in

2015, compared with 67 percent of such firms that had remained in the index from

2002 to 2012. Causes of this turnover include firms exiting the index, merging with or

being acquired by other entities, or no longer qualifying for controlled status due to a

drop in share ownership.

This updated study finds that the number of controlled companies in the S&P 1500

index increased by 16.7 percent between 2005 and 2015, though the number declined

by about eight percent over the three years since the 2012 study. Overall, the 10-year

rate of growth represents a slowdown from the initial study’s finding that the number

of controlled companies in the S&P 1500 index grew by 31 percent between 2002 and

2012.

The median market capitalization for controlled companies in the study almost doubled

from 2005 to 2015. The average controlled company market capitalization jumped even

more from $8.3 billion in 2005 to $20.6 billion in 2015 – compared with an increase

from $4.6 billion in 2002 to $10.7 billion in 2012. This strong growth is largely

attributable to the remarkable growth in market capitalization at Alphabet (formerly

Google) and Berkshire Hathaway – $361.9 billion and $370 billion respectively, as of

their most recent fiscal year end (2014) – and the addition of Facebook’s capitalization

of $218.2 billion to the mix. Alphabet’s market capitalization has grown by 72.5 percent

from $209.8 billion in 2012. Berkshire’s market capitalization has almost doubled in

value from $189.2 billion in 2012.


March 2016 | of 90

Multi-class capital structures with unequal voting rights were found to be the most

common control mechanisms in both 2002 and 2012. In 2015, almost three-quarters of

all controlled firms now have such a multi-class structure in place, representing an

increase of 5 percentage points from 2012. The appetite for a single-class stock capital

structure as a controlling mechanism appears to have waned (also by 5 percentage

points) in the three-year period between 2012 and 2015.

The number of controlled companies across all sectors has not changed by much, a

finding contrary to that of the 2012 study which found that the five sectors with the

fewest controlled companies had witnessed a 4.5 percentage point increase in the

prevalence of controlled companies as newer controlled firms made an appearance in

sectors that previously featured few or no controlled entities.

The Consumer Discretionary, Industrials and Consumer Staples sectors had the highest

prevalence of controlled firms in 2005 and 2015, at almost equal proportions in each of

the two years (approximately 40 percent, 16 percent, and 12 percent respectively)

suggesting that controlled firms have remained highly concentrated in a few sectors.

Within the Consumer Discretionary sector, controlled structures were most prevalent

among media firms both in 2005 and in 2015. The Energy and Healthcare sectors

suffered net losses of controlled firms in absolute numbers.

FIGURE 4: CHARACTERISTICS OF CONTROLLED FIRMS OVER TIME

As of 10/25/15

Year #

Controlled

Median Market

Capitalization

Super-Voting Shares

Enhanced Director

Election Rights

Single-class Structure

2002 87 $1.31 billion 28.7% 49.4% 21.8%

2005 90 $1.45 billion 35.6% 37.8% 26.7%

2012 114 $1.51 billion 30.7% 38.6% 30.7%

2015 105 $2.8 billion 35.2% 39% 25.7%

Performance and Risk

Financial Performance of Controlled vs. Non-Controlled Companies

Controlled company advocates argue that freedom from addressing short-term market

pressure allows management teams to invest for the long-term. Without having to

Source: ISS QuickScore Database, Compustat


March 2016 | of 90

respond to short-term capital market pressures, the theory goes, controlled companies

can make long-term investments in areas such as research and development and capital

projects. Following the path set in the original report, this section tracks the results of

numerous market tests of this theory.

Total Shareholder Returns (TSR)

Contrary to the abovementioned theory, the 2012 Controlled Company study found

that non-controlled companies outperformed their controlled cousins over a 10-year

period with respect to total shareholder returns (TSR). Also counter to conventional

wisdom, the 2012 study found that controlled companies outperformed non-controlled

firms over three shorter (one-, three-, and five-year) time frames.

In the 2015 iterations of these tests, non-controlled firms outperformed controlled

firms with respect to TSR over all time periods under review – one, three, five and 10

years. The largest outperformance spreads by non-controlled firms came in the near-

(one-year) and long-term (10-year) time frames – by 1.7 and 1.5 percentage points,

respectively.

Performance varies by control mechanism and time frame.

While the 2012 study found that multi-class stock companies underperformed non-

controlled companies for all but the shortest (one year) time periods, this updated

analysis shows that companies with multi-class stock structures marginally

outperformed non-controlled firms over the two intermediate time-periods under

review—by 0.8 and 0.01 percentage points over three- and five-year periods,

respectively.

While single-class controlled companies underperformed non-controlled companies

over a one-year period but outperformed over longer time periods in the 2012 study,

their returns lag in all time periods except the one-year period (with a 0.3 percentage

point outperformance margin) in this revised study.

Comparing the two studies also shows significant variations in performance over the

different time periods by controlled firms with a single class of voting stock relative to

those with multi-class capital structures. In 2012, controlled firms with single-class

capital structures outperformed controlled firms with multi-class structures over the

three-year, five-year, and 10-year periods while trailing both over the one-year period.

The reverse is true in this iteration of the study, as multi-class companies outperformed


March 2016 | of 90

single stock structure firms over all but the one-year period (in which there is a 2.6

percentage point underperformance margin). Taken as a whole, this finding suggests

that TSR performance is time period dependent, but also offers no empirical support to

the “controlled companies outperform” theory.

FIGURE 5: AVERAGE TOTAL SHAREHOLDER RETURNS BY CONTROL TYPE


Other Performance Measures

This updated study broadens the scope of comparative financial performance at

controlled versus non-controlled companies beyond shareholder returns to include

additional financial measures such as revenue growth, EBITDA growth, return on equity

(ROE), return on invested capital (ROIC), return on assets (ROA), cash balances and

liquidity ratios, capital expenditure ratios and dividend payout ratios.

Revenue Growth

Average revenue growth rates are highest at non-controlled firms relative to controlled

firms across all time periods examined. The underperformance of controlled firms

versus non-controlled ones with respect to average revenue growth rates is most

10

%

19

.8%

15

.5%

8.5

%

8.4

%

19

.5%

14

.7%

6.9

%

7.7

%

20

.6%

15

.6%

7.4

%

10

.3%

15

.9%

11

.9%

5.7

%

1 - Y R A V G . T S R 3 - Y R A V G . T S R 5 - Y R A V G . T S R 1 0 - Y R A V G . T S R



Source: Compustat


March 2016 | of 90

pronounced over the longer time periods (by 9.7 percentage points in the five-year

period and 37.1 percentage points in the 10-year period). Average revenue growth rates

for single-class stock controlled firms trail growth rates at multi-class stock controlled

companies over all periods reviewed except for the one-year time frame.

Some firms in the non-controlled universe have exhibited unusually high growth rates.

Wynn Resorts Ltd. experienced a phenomenal revenue growth rate of over 37,000

percent in fiscal year 2005, which skews the average growth rate in the 10 year period.

Similarly, Retail Opportunity Investments Corp. posted an unusually high five-year

average revenue growth rate of over 7,600 percent given that the firm’s fiscal year 2010

revenue growth rate exceeded 37,000 percent. The average 10-year revenue growth

rate for all non-controlled firms drops to 12.8 percent from 44.9 percent when Wynn’s

and Retail Opportunity Investments’ growth rates are excluded from the average

revenue growth rate calculations. Even with these adjustments for outliers, average

revenue growth rates at non-controlled firms remain higher than growth rates at

controlled companies in all time frames under consideration.

FIGURE 6-A: REVENUE GROWTH BY CONTROL TYPE


9.6

%

8.6

%

16

.4%

44

.9%

6.2

%

5.4

%

6.7

%

7.7

%

5.9

%

5.8

%

7.5

%

7.8

%

7.3

%

4.4

%

4.1

% 7.6

%

1 - Y R A V G . R E V E N U E G R O W T H



1 0 - Y R A V G . R E V E N U E G R O W T H



Source: Compustat


March 2016 | of 90

FIGURE 6-B: REVENUE GROWTH BY CONTROL TYPE – OUTLIERS EXCLUDED


EBITDA Growth

Controlled entities show higher average EBITDA growth levels than non-controlled firms

over all time periods examined. This EBITDA growth outperformance by controlled

companies versus non-controlled firms is greatest in the five- and 10-year periods (46.2

percentage points and 27.9 percentage points, respectively). On an average basis, non-

controlled companies experienced negative EBITDA growth over the three-year period

and average EBITDA growth at single-class stock controlled companies significantly

surpassed that at multi-class stock controlled firms over the one-year period (by 40.2

percentage points) and the three-year time frame (by 14.1 percentage points), but

multi-class stock firms outperformed over the five- and 10-year periods by 16.2 and 5.5

percentage points respectively.

When firms with outlier EBITDA growth rates are excluded the adjusted average EBITDA

growth rates for controlled firms trail the growth rates at non-controlled firms in the

one- and three-year time frames by approximately 11 and 6 percentage points

respectively, and EBITDA growth rates experience a reduction in the underperformance

gap at non-controlled firms relative to controlled firms in the five- and 10-year time

9.6

%

8.6

%

10

.9%

12

.8%

6.2

%

5.4

%

6.7

% 7.7

%

5.9

%

5.8

%

7.5

%

7.8

%

7.3

%

4.4

%

4.1

%

7.6

%




1 0 - Y R A V G . R E V E N U E G R O W T H



Source: Compustat


March 2016 | of 90

frames to 27.6 and 19 percentage points, respectively. Controlled companies with

unusually high EBITDA growth rates include Century Aluminum (in excess of 1,000

percent in fiscal year 2014, before which the firm experienced negative EBITDA growth

in every fiscal year since 2008), Bel Fuse Ltd. (over 2,600 percent in fiscal year 2010) and

Agilysys Inc. (over 3,000 percent in fiscal year 2011). The non-controlled firms with

outlier EBITDA growth rates are; InterDigital (fiscal year 2014 growth rate of almost

negative 3,000), MiMedx Group (fiscal year 2014 growth rate of almost negative 1,700),

Newfield Exploration (fiscal year 2013 growth rate of more than negative 18,000),

PulteGroup (fiscal year 2012 growth rate of more than negative 20,000) and

RenaissanceRe Holdings (fiscal year 2012 growth rate of more than negative 16,000).

FIGURE 7-A: EBITDA GROWTH BY CONTROL TYPE


10

.7%

-0.4

%

9.3

%

10

.9%

11

.9%

9.9

%

55

.5%

38

.8%

1.5

% 6.3

%

59

.7%

40

.2%

41

.7%

20

.4%

43

.5%

34

.7%

1 - Y R A V G . E B I T D A G R O W T H

3 - Y R A V G .E B I T D A

G R O W T H


1 0 - Y R A V G . E B I T D A G R O W T H



Source: Compustat


March 2016 | of 90

FIGURE 7-B: EBITDA GROWTH BY CONTROL TYPE – OUTLIERS EXCLUDED


Return on Equity

The Return on Equity (ROE) ratio measures a firm’s profit generation capacity from

shareholder equity investments.

Controlled companies have significantly lower average ROE ratios than non-controlled

firms across all study periods. In fact, the average ROE at controlled firms is negative in

the one- and three-year time periods and trails average ROE at non-controlled firms by

60 and 20.9 percentage points, respectively, over these time periods. Much of this

underperformance is attributable to single-class stock controlled firms which have a

negative average ROE over all time periods under consideration. Over the one-year

period, single-class controlled firms posted average ROE rates of less than negative 200

percent. While this figure may suggest that controlled companies are much less efficient

at deploying shareholder capital to generate profits than their non-controlled

counterparts, one controlled firm, Scientific Games Corp., has an astronomically high

negative one-year ROE (in excess of -6000 percent) that drags down the average ROE

figures. The average controlled company one-year ROE when this high negative ROE

14

%

14

% 18

.2%

15

.5%

2.7

% 8.2

%

45

.8%

34

.5%

0.6

% 5.8

%

53

.3%

37

.4%

9.2

%

15

.3%

22

.8%

25

.5%


3 - Y R A V G .E B I T D A

G R O W T H


1 0 - Y R A V G . E B I T D A G R O W T H



Source: Compustat


March 2016 | of 90

value is backed out rises by approximately 57 percentage points to 12.1 percent, which

is still below, but more comparable to, the average ROE ratio at non-controlled firms.

Similarly, when Scientific Games’ ROE is excluded from the calculation, the average one-

year ROE at single-class stock companies with a controlling shareholder jumps up from

negative 200 percent territory to 13.2 percent, which is not too far removed from the

average ROE at controlled firms with multiple classes of stock. For other time periods

under review the average ROE ratios for single-class stock controlled firms are, similarly,

all positive and more aligned with the ROE of multi-class stock controlled companies

(with the exception of the 10 year period) following the adjustments made for outlier

ROE values.

FIGURE 8-A: RETURN ON EQUITY RATIO BY CONTROL TYPE


14

.7%

14

.1%

13

.2%

11

.7%

-45

.2%

-6.8

%

0.2

%

4.0

%

11

.8%

12

.3%

11

.7%

11

.3%

-20

9.8

%

-62

.0% -3

3.0

%

-17

.2%

1 - Y R A V G .R O E



1 0 - Y R A V G .R O E



Source: Bloomberg


March 2016 | of 90

FIGURE 8-B: RETURN ON EQUITY RATIO BY CONTROL TYPE – OUTLIER EXCLUDED


Return on Invested Capital

The Return on Invested Capital (ROIC) ratio measures how efficiently a firm allocates its

capital toward generating profits.

Controlled firms have a slightly higher average ROIC than non-controlled firms across all

study time periods under consideration save for the 10-year period. The average ROIC

outperformance by controlled firms versus non-controlled firms in each of the one-,

three- and five-year periods is less than 0.7 percentage points and the

underperformance by controlled firms relative to non-controlled firms in the 10-year

period is by roughly half a percentage point. Controlled firms with single-class stock

structures have the highest average ROIC across all firm types in all time periods

reviewed with the exception of the 10-year period in which the average ROIC ratios at

both multi-class stock controlled firms and non-controlled companies are each higher by

almost 2 percentage points.

14

.7%

14

.1%

13

.2%

11

.7%

12

.1%

12

.5%

11

.9%

9.8

%

11

.8%

12

.3%

11

.7%

11

.3%1

3.2

%

13

%

12

.4%

5.3

%

1 - Y R A V G . R O E 3 - Y R A V G . R O E 5 - Y R A V G . R O E 1 0 - Y R A V G . R O E

RETURN ON EQUITY - EXCLUDING OUTLIERS



Source: Bloomberg


March 2016 | of 90

FIGURE 9: RETURN ON INVESTED CAPITAL RATIO BY CONTROL TYPE


Return on Assets

The Return on Assets (ROA) ratio measures how efficiently a firm deploys its assets to

generate earnings.

Over all time periods reviewed, the average ROA at controlled firms is comparable to,

but slightly higher than, that at non-controlled firms and is highest at controlled firms

with a single-class stock structure in the one- and three-year periods and, in the five-

and 10-year periods, highest at multi-class stock controlled firms.

8.1

%

8.3

%

8.5

%

7.9

%8.5

%

8.8

%

9.1

%

7.3

%8.2

%

8.5

% 9.1

%

7.8

%

9.4

%

9.6

%

9.2

%

5.9

%

1 - Y R A V G . R O I C 3 - Y R A V G . R O I C 5 - Y R A V G . R O I C 1 0 - Y R A V G . R O I C



Source: Bloomberg


March 2016 | of 90

FIGURE 10: RETURN ON ASSETS RATIO BY CONTROL TYPE


Cash

The management of cash provides a view into how effectively companies strike a

balance between the opportunity costs of having too much cash on their books versus

the downsides of not having sufficient cash reserves to cover operating or other needs.

For this study, cash balances represent the net balance of cash and cash equivalents as

of the most recent fiscal year end.

Controlled companies average $381 million more in cash balances than non-controlled

firms, and, within the controlled universe of firms, those with multi-class stock capital

structures have $1.3 billion more in cash, on average, than those with a single class of

stock. Similar observations are made for median cash balances – controlled firms’ cash

balances exceed those of non-controlled firms by $0.7 million, and controlled firms with

multi-class stock have the highest median cash balances, surpassing cash balances at

single-class stock controlled companies by $105.5 million.

The retention by controlled firms, particularly those with multiple classes of stock, of

significant cash reserves raises the question of whether holding on to these large piles

5% 5.1

%

5.2

%

4.9

%

5.7

%

5.9

% 6.1

%

5.2

%5.6

%

5.8

% 6.2

%

5.6

%6% 6.1

%

6%

4.1

%

1 - Y R A V G . R O A 3 - Y R A V G . R O A 5 - Y R A V G . R O A 1 0 - Y R A V G . R O A



Source: Bloomberg


March 2016 | of 90

of cash represents the most efficient use of such assets. The same question can be

asked of non-controlled firms with substantial cash reserves. For context, the five non-

controlled companies with the highest cash reserves (Bank of America, General Electric,

Goldman Sachs, Morgan Stanley and Citigroup) collectively hold $365.5 billion in cash,

with Bank of America alone representing 38 percent of this cash hoard – it should come

as no surprise that the largest U.S. banks constitute a majority of the entities with the

highest cash reserves given the Federal Reserve Board’s reserve requirements for

depositary institutions. On the other hand, the aggregate kitty is $110 billion for the five

controlled firms with the largest cash balances (Berkshire Hathaway, Alphabet, Ford,

Wal-Mart, and Twenty-First Century Fox) – with Berkshire Hathaway accounting for 58

percent of the collective controlled company cash pile. In the aggregate, the non-

controlled firms with the five largest cash balances represent 25 percent of the cash

reserves of all non-controlled companies, and the aggregate cash balance held by the

five controlled companies with the largest cash piles collectively amounted to 72

percent of all controlled company cash balances.

Liquidity Ratios

Liquidity ratios measure companies’ ability to service their short-term liabilities when

they fall due and are generally derived from dividing cash and other liquid assets by

short-term debt obligations and current liabilities. The ratios represent the margin of

safety companies have to cover short-term liabilities with cash and liquid assets. While

liquidity ratio values above one generally suggest good financial standing, much higher

ratios, on the other hand, could signal inefficient utilization of current assets rather than

reflect a state of financial well-being.

The liquidity ratios examined in this study include the average current, quick, and cash

ratios, over one-, three-, five- and 10- fiscal year time frames.

Current Ratio

The current ratio compares a firm’s current assets to its current liabilities to determine

if it has sufficient assets to service its debt over the next 12 months.

Controlled companies have higher average current ratios than non-controlled

companies across all time periods reviewed. Controlled firms with multi-class stock

structures have the highest current ratios in all time frames considered and controlled

entities with a single class of stock also have higher current ratios compared with non-


March 2016 | of 90

controlled firms in all periods reviewed except over the one-year period. Overall, 11.3

percent of controlled firms, on average, have a current ratio of less than one compared

with an average of 9.9 percent of non-controlled companies over the 10-year study

period. Across all firms, both controlled and non-controlled, the highest percentage of

firms with current ratios of less than one occurred eight fiscal years ago – or in 2007, at

the outset of the financial crisis, for most (86 percent) of the study firms that have 2014

as their most recent fiscal year end. That said, controlled companies have the highest

proportion of firms (15.4 percent) with current ratios of less than one eight fiscal years

ago – almost 4 percentage points higher than the percentage of non-controlled firms.

FIGURE 11: CURRENT RATIO BY CONTROL TYPE


Quick (“Acid Test”) Ratio

The quick ratio (or “acid test”) measures a company’s liquid assets (cash, marketable

securities and accounts receivable) compared with its current liabilities.

On average, controlled firms have lower quick ratios than non-controlled companies

over all time frames examined. Across all time periods multi-class stock controlled firms

2.4

6

2.4

4

2.4

4

2.4

3

2.6

1

2.6

6

2.6

6

2.5

8

2.6

6 2.7

2.6

8

2.6

2.4

2

2.5

4 2.5

7

2.5

1




Source: Bloomberg


March 2016 | of 90

have higher average quick ratios than single-class stock controlled entities, which have

the lowest ratio values of all firm types over all periods reviewed. When contrasted

against non-controlled firms, the quick ratios of multi-class controlled companies are

comparable over all but the shortest time period reviewed. In the 10-year period

reviewed, on average, 31.4 percent of controlled companies have quick ratios of less

than one, compared with 33 percent of non-controlled firms, which have the highest

proportion, on average, of quick ratios below one. However, it is worth noting that

controlled companies have a higher proportion of quick ratios below one than non-

controlled firms in each of the trailing five years examined, with controlled entities

representing the highest percentage of firms (38.1 percent) with sub-one quick ratios

observed eight fiscal years ago – approximately 3 percentage points higher than non-

controlled firms.

FIGURE 12: QUICK RATIO BY CONTROL TYPE


Cash Ratio

The cash ratio is a more conservative measure of a company’s liquidity, in that it only

compares cash and cash equivalents to current liabilities.

Controlled companies have lower average cash ratios than non-controlled firms across

all time periods assessed. Multi-class stock controlled firms have higher cash ratios on

average than single-class controlled companies over one- and three- year periods but

lower average cash ratios over five- and 10-year periods. Across the 10-year study

period, on average, controlled firms have a higher proportion of firms (59.2 percent)

with cash ratios of less than one compared with the proportion of non-controlled firms

(56.7 percent), with multi-class stock controlled firms exhibiting the highest prevalence

1.6

3

1.6

2

1.6

2

1.6

2

1.4

8

1.6 1.6

1

1.5

9

1.5

5

1.6

4

1.6

4

1.6

1.2

4 1.4

6

1.5

4

1.5

8




Source: Bloomberg


March 2016 | of 90

of average of cash ratios below one (63.8 percent). Single-class stock controlled firms

have a notably lower prevalence of cash ratios less than one compared with multi-class

stock controlled entities (a 17.9 percentage point differential, on average, over the 10-

year time frame) and boast the lowest percentage of firms with low cash ratios across

all firm types. The proportion of controlled companies with sub-one cash ratios peaked

seven fiscal years ago (in 2008 for firms with 2014 as their most recent fiscal year end)

whereas for non-controlled firms, the highest prevalence of firms sporting cash ratios

below one occurred in the most recent fiscal year as well as three fiscal years ago (2012

for firms with 2014 as their most recent fiscal year end) but this prevalence is

comparable to that eight fiscal years ago (2007 for firms with 2014 as their most recent

fiscal year end) when capital markets were experiencing a liquidity crunch.

FIGURE 13: CASH RATIO BY CONTROL TYPE


Capital Expenditure Ratio

The capital expenditure ratio, which is defined in this study as the ratio of a company’s

cash flow from operations to its capital expenditures, measures a firm’s ability to fund

and/or expand its business operations without having to issue debt or equity. A ratio

greater than one indicates that a firm’s operations are sufficient to fund its investment

requirements and suggests relative financial strength and greater growth capacity,

whereas a ratio of less than one indicates that a firm may need to issue debt to

maintain or grow its business.

Controlled companies have significantly lower capital expenditure ratios across all time

periods reviewed compared with non-controlled companies. The differential between

average capital expenditure ratios at controlled firms versus non-controlled ones is

0.9

9

0.9

8

0.9

9

0.9

9

0.8

7

0.9

7

0.9

7

0.9

4

0.9

3

0.9

9

0.9

6

0.9

2

0.6

9 0.9

1

0.9

8

1.0




Source: Bloomberg


March 2016 | of 90

highest (2.5 times) in the one-year period and lowest in the 10-year period (1.4 times).

Controlled firms with a single class of stock have the lowest average capital expenditure

ratios. Over the 10-year study period, an average of 12.7 percent of controlled

companies have a capital expenditure ratio of less than one compared with 18 percent

of non-controlled firms – this differential may be attributable to the larger sample size

of non-controlled firms (1395) versus controlled firms (105). The proportion of non-

controlled firms with a capital expenditure ratio of less than one is generally higher than

that of controlled firms across the 10 years reviewed. Conversely, controlled firms

generally have higher proportions of firms with ratios of two or greater than non-

controlled firms across the 10 year period reviewed.

FIGURE 14: CAPITAL EXPENDITURE RATIO BY CONTROL TYPE


Dividend Payout Ratio

The dividend payout ratio is defined, in this study, as total common dividends divided by

income before extraordinary items less minority interests and preferred dividends, the

result of which is multiplied by 100. While average dividend payout ratios over a one-

year period (i.e., the most recent fiscal year) are higher at non-controlled firms, they are

comparable to the average payout ratio at controlled companies. However, for the

10

.91

8.4

8

7.6

2

7.1

4

4.3

4

3.9

2 4.7

7

5.0

1

4.5

9

4.0

5

5.2

7

5.3

5

3.5

8

3.5

3

3.2

3 3.9




Source: Bloomberg


March 2016 | of 90

three-, five- and 10-year time frames, the average dividend payout ratios for non-

controlled firms vastly outstrip the average payout ratios at controlled firms, largely due

to several firms in the non-controlled company universe boasting payout ratios of above

1,000. In fact, a handful of REITs (Education Realty Trust and Healthcare Realty Trust)

have average dividend payout ratios in excess of 100,000 in some years. REITs are

typically legally required to distribute at least 90 percent of their earnings to

shareholders in order to maintain special tax benefits. Sixty percent of the distinct non-

controlled firms with an average payout ratio in excess of 1,000 are in the Real Estate

industry, and almost half (48 percent) of all non-controlled companies with a dividend

payout ratio of over 1000 in any of the 10 years reviewed are REITs. The average

dividend payout ratio at single-class stock controlled companies is significantly higher

than at multi-class stock controlled companies across all time periods – by almost 20

percentage points over a one-year period, over 33 percentage points over a three-year

period and by at least 50 percentage points over a five- and 10-year period.

If REITs with dividend payout ratios exceeding 1,000 percent are excluded, the average

payout ratios for non-controlled companies over the three-, five- and 10-year time

periods decrease by an average of approximately 952 percentage points and are more

comparable to the average dividend payout ratios at controlled firms. Even with

adjustments for outlier payout ratios, non-controlled entities still boast higher average

ratios than controlled companies in all time periods with the exception of the three-year

period.

FIGURE 15-A: DIVIDEND PAYOUT RATIO BY CONTROL TYPE


54

%

10

61

.6%

10

18

.4%

93

9.8

%

50

.3%

54

%

47

%

43

%

45

.8%

46

%

34

.2%

30

.5%

64

.6%

79

.7%

88

.6%

80

.5%


Chart Title



Source: Bloomberg


March 2016 | of 90

FIGURE 15-B: DIVIDEND PAYOUT RATIO BY CONTROL TYPE – OUTLIERS EXCLUDED


Risk at Controlled vs. Non-Controlled Firms

For this study, two measures are utilized to identify risk at companies in the study

universe: incidence of material weaknesses of internal controls and share price

volatility.

With respect to the former, companies with significant material weaknesses identified

in Section 404 disclosures potentially have ineffective internal controls, which may allow

inaccurate financial statements that hamper shareholders' ability to make informed

investment decisions and destroy market confidence and shareholder value. No

controlled companies were found to have incidences of material weaknesses either in

the most recent fiscal year or in the previous fiscal year, an observation that differs

from the 2012 study which found that four (3.7 percent) of controlled companies had

reported a material weakness. This updated study shows that 12 (0.9 percent) of the

non-controlled firms have material weaknesses, 42 percent of which reported such

weaknesses two fiscal years ago, compared with 26 (1.9 percent) of the non-controlled

companies with reported Section 404 material weaknesses in 2012.

50

.8%

47

.7%

63

.3%

53

.5%

50

.3%

54

%

47

%

43

%45

.8%

46

%

34

.2%

30

.5%

64

.6%

79

.7% 8

8.6

%

80

.5%




Source: Bloomberg


March 2016 | of 90

Volatility, a measure of the variation of stock price over time, is a commonly used

measure of investment risk. In this study, annual volatilities are used in all study periods

with the exception of the one-year time frame where daily volatilities underlie the

calculated averages.

Average volatility at non-controlled firms is lower than that for controlled companies

over the one-year and 10-year periods, and higher than that for controlled firms over

three-year and five-year periods. Controlled firms with single-class stock structures

generally have lower average volatility than both non-controlled firms and controlled

companies with multiple classes of stock, with the exception of the 10-year average

volatility where single-class stock controlled companies exhibited a higher average

volatility than either non-controlled firms or controlled companies with multi-class stock

structures.

These observations compare somewhat differently to the findings of the 2012 study,

which were that average volatility at non-controlled companies was lower than that for

controlled companies for each of the one-, three-, five-, and 10-year periods. Further,

the 2012 study found that controlled firms with a single class of stock exhibited lower

levels of volatility than both non-controlled firms and controlled firms with multi-class

structures in each of the periods reviewed.

FIGURE 16: HISTORICAL STOCK PRICE VOLATILITY BY CONTROL TYPE


27

.2%

23

.1%

25

.7%

36

.3%

27

.5%

21

.5% 25

.6%

37

.9%

27

.9%

22

.5%

26

%

36

.4%

26

.5%

18

.3% 2

4.4

%

42

.7%

1 - Y R A V G . V O L A T I L I T Y 3 - Y R A V G . V O L A T I L I T Y 5 - Y R A V G . V O L A T I L I T Y 1 0 - Y R A V G . V O L A T I L I T Y



Source: Bloomberg


March 2016 | of 90

Comparison of Governance Features

Boards of Directors

Board Independence

Not surprisingly, controlled companies lag in terms of board independence. In line with

findings from the 2012 study, average levels of board independence continue to be

higher at non-controlled companies compared with controlled firms, though

independence levels at both non-controlled and controlled firms have inched upward

since 2012. At non-controlled firms, 81.6 percent (80.5 percent in 2012) of directors are

classified by ISS as independent compared with 67.1 percent (66.3 percent in 2012) of

directors at controlled companies. This differential in average independence levels

between non-controlled and controlled companies is attributable, in part, to stock

exchange listing standards, which do not require controlled firms to have a majority of

independent directors.

Nearly one in 10 (9.5 percent) of controlled firms have boards that are less than

majority independent. Six controlled firms do not have a majority of independent board

members; four have 50 percent independence. The prevalence of controlled firms

without majority independent boards has not changed much since 2012, when 9.3

percent of controlled firms lacked a majority independent board. At that time, seven

had less than 50 percent independence on their boards and three had exactly 50

percent board independence. That said, 51 percent of controlled firms have boards that

are at least two-thirds majority independent, compared with 52.3 percent of firms in

2012. This decrease may be attributable to a change in the composition of controlled

firms in the S&P 1500 index between 2012 and 2015, whereby some firms with higher

levels of board independence have exited the S&P 1500 or have been taken private.

Board Committee Independence

With the exception of audit committees, average levels of independence on key board

committees are also generally higher at non-controlled companies than at controlled

firms.

Controlled companies with a multi-class stock structures have slightly higher average

levels of audit committee independence than their non-controlled counterparts. Audit

Committees, which are required to be fully independent by the SEC, the Sarbanes-Oxley

Act of 2002, and stock exchange listing standards, averaged 99.6 percent and 100


March 2016 | of 90

percent independence for non-controlled and controlled firms, respectively,

representing a slight improvement from 2012 when audit panel average independence

was 99.4 percent and 98.2 percent at non-controlled and controlled companies,

respectively. [NB: Independence for this study is defined by the ISS 2015 proxy voting

guidelines, which differ from the definitions used by the SEC and the listing exchanges,

which is why audit committee members are not 100 percent independent.] Twenty two

(or 1.6 percent) of non-controlled firms do not have fully independent audit

committees, per ISS’ independence standards, whereas only one controlled firm,

Reynolds American, has less than 100 percent audit committee independence.

A wider independence level gap is observed at compensation committees, which

averaged 99.5 percent independence at non-controlled companies (versus 99.4 percent

in 2012) and 95 percent at controlled companies (compared with 95.4 percent in 2012).

Controlled companies (where more than 50 percent of the voting power is held by an

individual entity or entities) are exempt from stock exchange listing requirements

regarding compensation committee independence.

The largest gap in key committee average independence levels is observed at

nominating committees; members are not required to be independent by law, under

SEC rules or NASDAQ listing requirements (which also do not mandate the

establishment of a nominating committee). Only the NYSE requires listed companies to

have fully independent nominating committees. Nominating committees averaged 99.1

percent independence (vs. 98.9 percent in 2012) at non-controlled companies,

compared with 89.2 percent at controlled companies (also 89.2 percent in 2012).

Controlled firms with multi-class stock structures have notably lower average levels of

nominating committee independence (85.4 percent) than both single-class controlled

companies and non-controlled firms.

Fourteen controlled companies (13.3 percent) do not have separate nominating

committees, compared with five (0.3 percent) non-controlled companies. In 2012, 14

controlled companies (13 percent) did not have separate nominating committees versus

six (0.4 percent) non-controlled firms.


March 2016 | of 90

FIGURE 17: AVERAGE BOARD & COMMITTEE INDEPENDENCE BY CONTROL TYPE

As of Most Recent AGM on 10/25/15

Director Tenure

In recent years, both investors and corporate boards have turned their attention to the

topic of director tenure, particularly as it relates to the need to inject fresh skillsets and

perspectives into boardrooms. Proponents of this sharper focus point to the need to

upgrade or complement existing board members’ experience and industry and subject

matter expertise, as well as to the need for greater board diversity. Given the rapid

ascendancy of transformative technologies and the challenges posed by a constantly

shifting global business environment along with the associated risks and opportunities,

some investors have expressed concerns around perceived or actual atrophy of relevant

experience and skills sets or diminished independence at boards with a high proportion

of long-tenured directors. Indeed, some investors have even instituted policies to cast

votes against long-tenured board members under certain circumstances. Other

investors contend that long board tenures and low turnover not only imperils the

caliber of board skill sets, but impedes boardroom diversity more broadly. Given the

linkage and interdependencies of the practices and dynamics around tenure, turnover

and diversity on boards, it is difficult to argue that these issues are not inherently

entwined with the broader topic of boardroom refreshment.

Contrasting board tenure at controlled and non-controlled companies confirms what

some likely suspect – that controlled firms, where shareholders have less of a voice,

81

.6%

99

.6%

99

.5%

99

.1%

67

.1%

99

.6%

95

.0%

89

.2%

66

.3%

10

0%

94

.4%

85

.4%

69

.3%

98

.5%

96

.8%

98

.4%

A V G . B O A R D I N D E P E N D E N C E

A V G . A U D I T C M T E . I N D E P .

A V G . C O M P . C M T E . I N D E P .

A V G . N O M . C M T E . I N D E P .





March 2016 | of 90

have longer tenured boards than their non-controlled counterparts. Board tenure is two

years longer, on average, for the universe of sitting directors at controlled firms (11

years) versus non-controlled companies (9 years). Average board tenure at controlled

firms with multi-class stock is 11.2 years, compared with 10.2 years for those featuring a

single class of stock.

The lengthy board tenures at controlled versus non-controlled firms are even more

apparent when tenure is viewed by gradations. The percentage of controlled firms

where average board tenure is 20 or more years is almost 2 percentage points higher

than at non-controlled firms – this disparity is more pronounced at controlled firms with

a single class of stock where the proportion of firms with an average board tenure of at

least 20 years is more than three times that at non-controlled firms. Similar gaps are

observed in other long average tenure categories (e.g. the prevalence of controlled

firms with average board tenure between 15 and 19 years is almost five times that

found at non-controlled firms), but the gap shrinks as average board tenure diminishes

until an inflection point is reached at an average tenure of five to nine years where the

proportion of non-controlled firms with this tenure is about 22 percentage points higher

than that at controlled firms.

FIGURE 18: AVERAGE BOARD TENURE BY CONTROL TYPE


1.2

% 5.6

%

13

.0%

17

%

52

.2%

10

.5%

0.5

%

3%

21

%

17

% 20

%

30

%

8%

0%2

.7%

20

.3%

20

.3%

23

.0% 28

.4%

4.1

%

0%

3.8

%

23

.1%

7.7

% 11

.5%

34

.6%

19

.2%

0%

2 0 + Y R S A V G .

T E N U R E

1 5 - 1 9 Y R S A V G . T E N U R E

1 2 - 1 4Y R S A V G .T E N U R E

1 0 - 1 3Y R S A V G . T E N U R E

5 - 9 Y R S A V G . T E N U R E

1 - 4 Y R S A V G . T E N U R E

0 Y R S A V G .

T E N U R E

% F

IRM

S





March 2016 | of 90

Board Diversity

Lengthy director tenure and low board turnover can limit efforts to promote greater

gender, race, ethnic, and professional diversity on boards. Some academic research has

also linked better firm performance or board level decision-making to greater

representation of women on boards.

Female Representation

Women occupied 16.5 percent of all board seats at non-controlled firms, comparable to

15.6 percent at controlled firms. The prevalence of women on boards at multi-class

stock controlled firms (16 percent) is almost two percentage points higher than that at

controlled companies with a single-class structure (14.1 percent).

Controlled companies have a slightly larger proportion of firms with a high percentage

of women on boards (i.e. 50 percent or more) than non-controlled firms. While no

single-class stock controlled firms have at least 50 percent female board representation,

the prevalence of firms in the S&P 1500 index with a majority of female directors is

negligible. At lower, but still significant, levels of female representation, non-controlled

firms generally have a higher prevalence of boards with a larger proportion of women

than controlled firms. The proportion of firms with zero women on their boards is

almost 4 percentage points higher among controlled companies than non-controlled

companies.

Similarly, the proportion of firms where there is just one woman on the board is higher

at controlled versus non-controlled firms, highest at controlled firms with multi-class

stock structures, and comparable between non-controlled and single-class stock

controlled firms. The proportion of non-controlled companies with two women on the

board is 9 percentage points higher than at controlled firms, and there is a 2 percentage

point difference between the prevalence of multi-class stock and single-class stock

controlled firms with two women on the board. Multi-class stock controlled companies

have the highest proportion of firms with three women on the board and the

prevalence of firms under this category is comparable at all controlled versus non-

controlled firms. Single-class controlled companies have the highest proportion of firms

with 4 or more women on the board (11.5 percent), followed by non-controlled firms

(5.3 percent), and then by controlled firms with a multi-class stock structure (3.8

percent).


March 2016 | of 90

FIGURE 19-A: % WOMEN ON BOARDS (WOB) BY CONTROL TYPE


FIGURE 19-B: # WOMEN ON BOARDS (WOB) BY CONTROL TYPE


0.5

%

11

%

21

.4%

76

.4%

17

.4%

1.0

% 9.5

%

19

%

74

.3%

21

%

1.3

% 10

.1% 2

1.5

%

75

.9%

17

.7%

0%

7.7

%

11

.5%

69

.2%

30

.8%

% W O B = 5 0 % + % W O B = 3 0 % + % W O B = 2 5 % + % W O B = 1 0 % + % W O B = 0 %

% F

IRM

S



0.9

% 4.4

%

13

.1%

30

%

34

.2%

1%

4.8

%

12

%

21

%

40

%

1.3

%

2.5

%

16

.5% 2

1.5

%

40

.5%

0%

11

.5%

0%

19

.2%

38

.5%

5 + W O B 4 W O B 3 W O B 2 W O B 1 W O B

% F

IRM

S






March 2016 | of 90

Minority Representation

The divide between the proportion of minorities on boards at controlled versus non-

controlled firms is much wider than the differential between the proportion of female

directors at controlled and non-controlled firms. At non-controlled firms, minority

directors occupy 10.4 percent of all board seats compared with 7.2 percent of seats at

controlled firms. At single-class controlled firms minority directors represent 5.1 percent

of board seats compared with the 7.8 percent board seat prevalence at controlled

companies with a multi-class stock structure. Few non-controlled firms (1 percent) and

no controlled firms have boards with high minority representation (i.e. where minority

directors constitute at least 50 percent of the board).

As the proportion of minority representation on boards decreases below 50 percent,

non-controlled firms generally increased their lead over controlled firms with respect to

the percentage of firms with minority directors at certain levels, that is until the

proportion of minorities on the board drops to zero in which case controlled firms have

a higher percentage of firms with no minorities on the board vis-à-vis non-controlled

companies.

The disparity between the proportion of controlled firms that have no minorities on

their boards and non-controlled firms is stark (a 20 percentage point differential). The

percentage of single-class stock controlled firms with zero minorities on the board is

almost 14 percentage points more than at controlled firms with multi-class stock

structures. While a higher proportion of non-controlled firms have between one and

two, and four or more minorities on their boards and no controlled firms have four or

more minority directors, a higher percentage of controlled firms have three minorities

on the board than non-controlled firms. Half of the controlled firms with three

minorities on the board are in the Media industry and 70 percent are in the S&P 500

index. All the controlled firms with three minority directors on their respective boards

have minorities representing between 20 and 30 percent of the board.


March 2016 | of 90

FIGURE 20-A: % MINORITIES ON BOARDS (MOB) BY CONTROL TYPE


FIGURE 20-B: # MINORITIES ON BOARDS (MOB) BY CONTROL TYPE


1%

5.6

% 10

.0%

47

.7%

43

%

0% 3

% 6%

33

%

63

%

0% 2

.7% 6.8

%

35

.1%

59

.5%

0% 3

.8%

3.8

%

26

.9%

73

.1%

% M O B = 5 0 % + % M O B = 3 0 % + % M O B = 2 5 % + % M O B = 1 0 % + % M O B = 0 %

% F

IRM

S



1.1

%

1.7

%

6.2

%

16

.6%

32

%

0%

0%

8.6

%

9.5

%

25

.7%

0%

0%

10

.1%

10

.1%

27

.8%

0%

0%

3.8

%

7.7

%

19

.2%

5 + M O B 4 M O B 3 M O B 2 M O B 1 M O B

% F

IRM

S






March 2016 | of 90

Board Refreshment

Regular board refreshment and robust director succession planning has jumped to the

top of many investors’ agendas. A number of investors have advocated for, and some

boards have adopted, more proactive director recruitment efforts and board

refreshment processes to ensure that the mix of boards’ overall skillsets and collective

professional experiences remain optimal and relevant as the business landscape shifts

constantly and demands solutions to new and evolving challenges.

To evaluate the degree of board refreshment, this study examines the prevalence of

new directors (zero years of board service), recent directors (one to three years of

board service), long-tenured directors (10 or more years of service) and extended

tenure directors (15 or more years of board service) at controlled and non-controlled

firms.

The proportion of total board seats filled by new board nominees as of the most recent

shareholder meetings at non-controlled companies is 4.9 percent compared with 3.6

percent at controlled firms. Multi-class stock controlled companies have appointed a

higher proportion of new nominees (4 percent) than at controlled firms with a single

stock class (2.1 percent). Similar observations are made with respect to recently

appointed directors, who account for about 23 percent of board seats at non-controlled

firms compared with roughly 20 percent of seats at controlled firms. However, single-

class stock controlled firms appear to have recruited a much higher proportion (28.6

percent) of recent nominees than controlled companies with multi-class stock

structures (17 percent).

The proportion of new nominees that are female is comparable at non-controlled firms

(23.1 percent) and controlled firms (23.5 percent). The proportion of new female

nominees at controlled single-class stock firms (40 percent) is almost double that at

controlled multi-class stock companies. Non-controlled firms have a higher proportion

of board seats occupied by recently appointed female board nominees (22.8 percent)

than their controlled company counterparts (20.6 percent), and the proportion of

recently appointed female nominees at single-class stock controlled firms (20.9 percent)

slightly edges out that at multi-class controlled companies – by less than half a

percentage point.

The proportion of firms where new nominees constituted zero percent of the board is 9

percentage points higher at controlled companies relative to non-controlled firms, and

highest at controlled firms with single-class stock structures (almost 90 percent of


March 2016 | of 90

firms), followed by at controlled companies with multiple classes of stock (more than 75

percent of firms). The proportion of controlled entities with a single-class stock

structure that have at least half their board seats filled by recently appointed nominees

is almost double that of non-controlled firms and almost six times higher than that at

controlled firms with a multi-class stock structure. The percentage of firms where recent

nominees constitute a third and a quarter of the board is also highest at controlled firms

with a single class of stock, which conversely, have the lowest proportion of firms where

recent nominees comprised at least 5 percent of the board. While controlled single-

class stock firms generally have the highest proportions of recent board appointments

amongst both non-controlled and controlled firms, they also have the highest

proportion of boards without any recently appointed nominees.

Long board tenures are examined by classifying the proportion of controlled and non-

controlled firms according to the percentage of boards that have at least half, a third, a

quarter, a tenth, 5 percent, and 0 percent of their members with 10 or more years of

service. Controlled companies, and multi-class stock controlled firms in particular, have

the highest proportion of firms with the largest percentage of long- tenured directors.

Conversely, non-controlled firms have the highest proportion of firms with the lowest

proportion of long-tenured board members. Controlled companies, particularly those

with a single class of stock, have the largest percentage of firms with the highest

proportions of board members with extended tenures (15 years or more). Non-

controlled firms have the highest proportion of firms where no board members have at

least 15 years of service.

FIGURE 21-A: BOARD REFRESHMENT BY CONTROL TYPE – NEW BOARD NOMINEES


0.5

%

1.8

%

3.7

%

24

.3%

31

.1%

69

.7%

0%

0% 2%

18

% 26

%

79

%

0%

0% 1.4

%

18

.9% 29

.7%

75

.7%

0%

0% 3

.8% 1

5.4

%

15

.4%

88

.5%

5 0 % + O F B O A R D = N E W

3 3 . 3 % + O F B O A R D = N E W

2 5 % + O F B O A R D = N E W

1 0 % + O F B O A R D = N E W

5 % + O F B O A R D = N E W

0 % O F B O A R D = N E W

% F

IRM

S





March 2016 | of 90

FIGURE 21-B: BOARD REFRESHMENT BY CONTROL TYPE – RECENT BOARD NOMINEES


FIGURE 21-C: BOARD REFRESHMENT BY CONTROL TYPE – LONG TENURED BOARD NOMINEES


8.4

%

23

.8%

39

.5%

79

.4%

84

.4%

16

.4%

6%

15

%

31

%

72

% 78

%

27

%

2.7

% 10

.8% 2

4.3

%

71

.6%

79

.7%

25

.7%

15

.4% 2

6.9

%

50

%

73

.1%

73

.1%

30

.8%

5 0 % + O F B O A R D = R E C E N T

3 3 . 3 % + O F B O A R D = R E C E N T

2 5 % + O F B O A R D = R E C E N T

1 0 % + O F B O A R D = R E C E N T

5 % + O F B O A R D = R E C E N T

0 % O F B O A R D = R E C E N T

% F

IRM

S



39

%

64

.2% 74

.9% 88

.9%

90

.5%

9.5

%

47

%

72

% 79

% 85

%

86

%

14

%

48

.6%

75

.7%

82

.4%

86

.5%

87

.8%

12

.2%

42

.3%

61

.5%

69

.2% 80

.8%

80

.8%

19

.2%

5 0 % + O F B O A R D =

L O N G T E N U R E D

3 3 . 3 % + O F B O A R D =


2 5 % + O F B O A R D =


1 0 % + O F B O A R D =


5 % + O F B O A R D =


0 % + O F B O A R D =


% F

IRM

S






March 2016 | of 90

FIGURE 21-D: BOARD REFRESHMENT BY CONTROL TYPE – EXTENDED TENURE NOMINEES


Board Experience & Skillsets

This study examines board experience and skillsets at controlled versus non-controlled

firms by evaluating trends around the lengths of outside board service as well as

directors’ professional experience. Outside board service is defined as board

membership at the other external boards that a director serves on in addition to the

board seat at a given firm. In other words, outside board service excludes service at the

firm under examination with consideration given to just external board seats. Some

level of outside board service is generally viewed in positive light, given that such

service could bring valuable and diverse perspectives, skillsets, and experience to

boardrooms. Outside board experiences often facilitate inward flows of information on

best practices and lessons learned, including insights on trends and developments at

other boards or in other industries that could positively or negatively impact the firm in

question. That said, service on too many boards can strain a director’s ability to be

sufficiently focused and engaged especially during difficult periods.

This study finds a higher proportion of controlled firms with average outside board

tenure in excess of 15 years than non-controlled firms. The prevalence of single-class

stock controlled firms with directors who have greater than 15 years of outside board

7.7

%

22

.9% 3

5.5

%

65

.7%

71

.4%

28

.6%

21

%

43

%

55

%

72

%

74

%

26

%

18

.9%

41

.9% 5

4.1

%

74

.3%

74

.3%

25

.7%

26

.9%

46

.2% 5

7.7

% 65

.4%

73

.1%

26

.9%

5 0 % + O F B O A R D =

E X T E N D E D T E N U R E

3 3 . 3 % + O F B O A R D =


2 5 % + O F B O A R D =


1 0 % + O F B O A R D =


5 % + O F B O A R D =


0 % + O F B O A R D =


% F

IRM

S





March 2016 | of 90

tenure is the highest of all firm types with almost four times that at non-controlled

firms. Controlled entities also feature the highest percentage of firms with average

outside board tenure between 10 and 14 years, with multi-class stock controlled firms

having the lion’s share of outside board tenures in this range. There is a higher

proportion of non-controlled firms with average outside board tenure between five and

nine years than all controlled firms in the aggregate, and controlled outfits with multi-

class stock structures have the highest proportion of firms with outside board tenure

within this range. Non-controlled companies also have a higher proportion of firms with

average outside board tenure between zero and four years, whereas single-class stock

controlled companies boasted the highest overall percentage of firms with outside

board tenure in this category. The proportion of controlled firms with board members

that have no outside board service experience is almost double that at non-controlled

firms, with the lion’s share of such firms comprising single-class stock controlled

companies.

FIGURE 22: OUTSIDE BOARD SERVICE TENURE BY CONTROL TYPE


Examining the professional experiences of more than 14,000 directors at controlled and

non-controlled firms in the S&P 1500 index as of the most recent shareholder meetings

reveals that retired professionals and executive officer directors, respectively,

constitute the highest proportion of board members at non-controlled firms, whereas at

controlled firms, and particularly those with multi-class stock structures, executives,

3.2

%

13

.6%

59

.6%

18

.3%

5.3

%

5%

14

%

57

%

14

%

10

%

2.7

%

16

.2%

60

.8%

10

.8%

9.5

%

11

.5%

7.7

%

46

.2%

23

.1%

11

.5%

1 5 + Y R S A V G . T E N U R E

1 0 - 1 4 Y R S A V G . T E N U R E

5 - 9 Y R S A V G . T E N U R E

0 - 4 Y R S A V G . T E N U R E

N O O U T S I D E B O A R D S E R V I C E

% F

IRM

S





March 2016 | of 90

who occupy more than a third of all board seats, appear to be the most common

director type followed by retired professionals. Directors with financial services

experience represent the third largest professional experience category at both

controlled and non-controlled firms. Comprising more than a tenth of all directors at

non-controlled firms, consultants also represent a meaningful mix of director skillsets,

including at controlled firms where they account for 8.6 percent of all directorships.

FIGURE 23: PROFESSIONAL BOARD EXPERIENCE BY CONTROL TYPE


Almost all firms in the S&P 1500 index have financial experts on their boards.

Collectively, 99.3 percent of non-controlled firms have some financial expertise on their

boards, compared with 97 percent of controlled companies. All single-class stock

controlled companies in the index have at least one director with financial expertise on

the board, as do 96 percent of controlled firms with multiple stock classes. As a

percentage of all directorships, the preponderance of directors with financial expertise

is highest at non-controlled firms (23.5 percent); financial experts fill 20.2 percent of all

board seats at controlled firms; and single-class stock controlled firms have 22.6 percent

of board seats occupied by financial experts compared with 19.4 percent of

directorships at multi-class stock controlled firms.

Similar observations persist when the proportion of firms with financial experts on their

boards is examined. Slightly more than 6 percent of non-controlled companies have at

31

.5%

23

.6%

21

.5%

29

.9%

25

.6%

34

.6%

36

%

30

.3%

13

.2%

13

.8%

13

.1%

15

.8%

10

.5%

12

.1%

13

.2%

8.5

%10

.5%

8.6

%

8.4

%

9.4

%

4%

3.2

%

3.3

%

2.6

%

2.1

%

2.5

%

2.6

%

2.1

%

N O N - C O N T R O L L E D C O N T R O L L E D C O N T R O L L E D : M U L T I -C L A S S S T R U C T U R E

C O N T R O L L E D : S I N G L E - C L A S S

S T R U C T U R E

% D

IREC

TOR

SHIP

S

Retired Executive FinancialServices Other Consultant Academic Attorney/Counsel



March 2016 | of 90

least half of the board comprised of financial experts. However, controlled firms with a

single-class stock structure have the highest percentage of firms with at least half of the

board’s members bringing financial expertise to the table (7.7 percent), dwarfing the

proportion of multi-class stock controlled companies with similar levels of financial

expertise (2.7 percent). Non-controlled companies also boast a higher proportion of

firms with financial experts constituting between 30 and 49 percent of the board than

their controlled company counterparts. Controlled entities comprise a higher

proportion of companies with diminishing percentages of financial expertise on the

board than non-controlled firms, and for instance, feature the highest prevalence of

firms where financial experts comprise less than 30 percent of the board.

FIGURE 24: FINANCIAL EXPERTS OF BOARDS (FEOB) BY CONTROL TYPE


Director Election Standards

Plurality voting remains the default standard for director elections in most jurisdictions.

However, in recent years, majority voting coupled with a plurality carve-out for

contested elections has gained favor with investors and has been adopted by 88 percent

of large-cap companies (an increase from roughly 80 percent of large-cap firms in 2012,

and 52 percent of such firms in 2008). A majority voting standard for director elections

6.1

%

27

.2%

57

.4%

9.2

%

4%

18

%

64

%

14

%

2.7

%

17

.6%

63

.5%

16

.2%

7.7

%

19

.2%

65

.4%

7.7

%% F E O B = 5 0 + % % F E O B = 3 0 - 4 9 % % F E O B = 1 0 - 2 9 % % F E O B = 0 - 9 %

% F

IRM

S





March 2016 | of 90

has been adopted by 60.1 percent of the non-controlled firms in our S&P 1500 universe

(a broader universe than the large-cap only S&P 500), a 12.2 percentage point increase

in prevalence from 2012; 52.8 percent (vs. 40.9 percent in 2012) of non-controlled firms

have also adopted a plurality carve-out for contested elections. Another 17.5 percent

(vs. 13.2 percent in 2012) of non-controlled companies maintain a plurality voting

standard but have adopted a policy whereby a director who received more “withhold”

votes than votes “for” must tender his or her resignation.

Majority vote standards continue to be much less prevalent at controlled firms given

their limited utility to non-controlling stockowners. Still, 20 percent of controlled firms

have adopted such a standard compared with 14.8 percent of firms in 2012. Controlled

firms with a single class of stock have a higher prevalence of majority vote standards

(25.9 percent) than those with multiple classes of stock (18 percent). Some 6.7 percent

(vs. 7.4 percent in 2012) of controlled firms with a plurality vote standard have adopted

director resignation policies, and 12.4 percent of controlled firms have also adopted a

plurality carve-out for contested elections.

FIGURE 25: DIRECTOR ELECTION STANDARDS BY CONTROL TYPE


*Includes firms with both a majority and plurality vote standard

60

.1%

71

.5%

52

.8%

20

%

18

.1%

12

.4%18

%

14

.1%

9%

25

.9%

29

.6%

22

.2%

M A J O R I T Y V O T E S T D . D I R E C T O R R E S I G N A T I O N R E Q U I R E M E N T *

P L U R A L I T Y C A R V E O U T F O R C O N T E S T E D E L E C T I O N S

% F

IRM

S





March 2016 | of 90

Features that Allow Minority Shareholders to Gain Board Representation

Avenues through which minority shareholders can gain board representation are

generally few and far between at controlled and non-controlled companies alike. One

such avenue is cumulative voting, which provides shareholders access and influence

over director elections by allowing them to amass all of their votes for directors and

apportion these votes among one, a few, or all of the directors on a multicandidate

slate. As such, through cumulative voting, minority shareholders can focus their voting

power to elect one or more directors. At controlled companies, where majority insider

control would preclude minority shareholders from having any representation on the

board, cumulative voting could allow such representation.

However, the prevalence of cumulative voting has declined at both controlled and non-

controlled firms since 2012, by 1.2 and 3.6 percentage points, respectively. This study

has found that only 3.8 percent of controlled firms and 4.7 percent of non-controlled

firms allow shareholders to cumulate their votes in boardroom elections. At controlled

companies with multi-class stock structures, just 1.3 percent of firms allow for

cumulative voting compared with 5.1 percent of firms in 2012, and at controlled

companies with a single class of stock, where cumulative voting could be used more

effectively, 11.1 percent of firms offer this right versus 11.4 percent of firms in 2012,

reflecting the continued overall decline of cumulative voting provisions in the S&P 1500

index.

Shareholder Rights and Takeover Defenses

U.S. firms employ a multitude of tools to defend against unsolicited takeover attempts,

including classified boards, poison pills, and supermajority voting requirements. On the

flip side, shareholders can call upon a number of governance tools to protect their rights

as company owners, including the ability to call special shareholder meetings and act by

written consent. These provisions should be viewed within the context of where they

are employed, including whether the company is or is not controlled, to judge whether

they are consistent with, or contrary to, governance best practice. On balance, this

study’s findings corroborate the prior study’s intuitive observations: takeover defenses

are less prevalent at controlled companies, which reflects their limited utility at such

firms.


March 2016 | of 90

Supermajority Voting Requirements

Supermajority voting requirements require that certain voting items, such as

amendments to companies’ governing documents or mergers, receive support from

holders of greater than a majority of shares cast or outstanding, typically two-thirds or

more to pass. At dispersedly-held companies, supermajority voting requirements may

deter actions desired by shareholders even when holders of a majority support such

action. Supermajority voting requirements can also serve as a takeover defense.

However, at controlled companies (or companies with a substantial, but non-controlling

block), supermajority voting requirements can provide a degree of protection to

minority shareholders by preventing the controlling (or large) shareholder from acting

unilaterally. Supermajority voting requirements are less prevalent at controlled

companies, whose controlling shareholders have little reason to support them.

Supermajority voting requirements to amend issuer governing documents are found at

57.9 percent of non-controlled companies (versus 59.9 percent in 2012), with 41.7

percent of firms employing a two-thirds requirement, roughly one-third of firms

employing an 80 percent requirement, and approximately 18 percent of firms utilizing a

75 percent vote requirement. Twenty six, (or 3.2 percent) of non-controlled firms have

in place supermajority requirements in excess of 80 percent, including four firms with

requirements above 90 percent.

In contrast, supermajority voting requirements to amend corporate governing

documents are found at just 38.1 percent of controlled companies (down from 42.5

percent of firms in 2012). Fifty-three percent of controlled firms have a two-thirds

supermajority requirement, 27.5 percent of the firms have an 80 percent requirement,

and 12.5 percent of firms require 75 percent shareholder approval to amend governing

documents. Controlled firms with multi-class stock structures comprise 65 percent of all

controlled firms with supermajority vote requirements and 39.2 percent of these firms

have supermajority thresholds versus 51.9 percent of controlled firms with single-class

stock structures.

Supermajority voting requirements to approve mergers exist at 19.1 percent of non-

controlled firms, down materially from 33.6 percent of firms in 2012; perhaps this 14.5

percentage point decline suggests greater deal appetite and reflects a successful

shareholder proposal campaign aimed at these restrictions. Of the non-controlled firms

with supermajority vote requirements, 83.5 percent have a two-thirds supermajority

vote requirement to approve a merger, 8.3 percent of firms employ a 75 percent


March 2016 | of 90

supermajority threshold, and 6 percent of firms utilize an 80 percent approval

requirement.

On the other hand, 18.1 percent of controlled companies have a supermajority voting

requirement to approve a merger transaction (down from 29.2 percent in 2012), and

the vast majority (78.9 percent) of such firms have a two-thirds supermajority

requirement. The drop in supermajority vote hurdles at controlled companies between

2012 and 2015 (and the narrow gap in the prevalence of such hurdles relative to non-

controlled firms) could be attributable to increased deal appetite. Controlled firms with

multiple stock classes comprise about 90 percent of controlled firms with a merger

approval supermajority vote standard and 77 percent of these firms have a two-thirds

supermajority vote requirement to approve mergers. In the aggregate, 21.8 percent of

firms with a multi-class stock structure have supermajority thresholds for merger

transaction approvals compared with 7.4 percent of single-class stock controlled firms,

all of which stipulated a two-thirds approval threshold.

Shareholders' Right to Call Special Meetings and Act by Written Consent

As with supermajority voting requirements, shareholders' right to act between annual

meetings can be viewed differently by minority shareholders at controlled and non-

controlled companies. At a non-controlled company, shareholders may use their right to

propose business between annual shareholder meetings, to remove directors or force a

vote on a merger not favored by the board. Accordingly, these rights can be viewed as

potential checks on entrenchment. At controlled companies, the right to act between

meetings has little real value for minority shareholders. For insiders, however, the right

to act between meetings – particularly through the use of written consent – can give

insiders the ability to act quickly and unilaterally, and often with minimal transparency.

Provisions enabling shareholders to act by written consent are more prevalent at

controlled companies, with 52.4 percent of controlled companies allowing action by

written consent (up slightly from 51.9 percent in 2012). The overwhelming majority of

these firms (98.2 percent) have a 50 or 51 percent threshold to act by written consent –

one firm, Telephone and Data Systems, has a 90 percent threshold. Controlled firms

with multi-class stock structures comprise 76.4 percent of all controlled companies with

a written consent right and 53.8 percent of multi-class stock controlled firms have a

written consent right, compared with 48.1 percent of controlled single-class stock

companies that have such a right. [NB: These percentages do not include a shareholder


March 2016 | of 90

right to act by unanimous written consent only, which is unusable at widely-held

companies.]

The ability to act by written consent is available to shareholders at 26.6 percent of non-

controlled companies (compared with 26.2 percent in 2012), and 91.4 percent of non-

controlled firms with such a right use a simple majority threshold whereas 2.2 percent

of firms stipulate a two-thirds requirement.

Similarly, shareholder rights to call a special meeting are more prevalent at controlled

firms, 59 percent of which have such a right (versus 54.6 percent in 2012). The threshold

to call such a meeting is most commonly set at 50 or 51 percent (which generally allows

only the controlling shareholder to utilize this right). These thresholds are found at 51.6

percent of controlled firms with this right, followed by a 10 percent threshold at 19.4

percent of firms, and 12.9 percent of controlled firms specify a 25 percent special

meeting right threshold. Controlled firms with multi-class stock comprise 76 percent of

all controlled companies with a special meeting right. About 60.3 percent of controlled

multi-class stock companies provide for a special meeting right, compared with 55.6

percent of single-class stock controlled companies. The ability for shareholders to call a

special meeting is available at 55.1 percent of non-controlled firms, up from 49.6

percent of such firms in 2012. The most prevalent threshold for calling a special meeting

at non-controlled companies is by 10 percent of shareholders (29.8 percent of the

firms), followed by a 25 percent special meeting right (21 percent of firms) and,

collectively, 27.2 percent of non-controlled firms allow 50 or 51 percent of shareholders

to call for a special meeting.

Classified Boards

Most states, including Delaware, the legal domicile of a majority of U.S. companies,

authorize boards to be divided into three separate classes so that one-third of the board

stands for election in a given year. Classifying the board makes it more difficult to

change control of a company through a proxy contest involving the election of directors.

In recent years, however, classified boards have fallen out of favor, as investors have

argued that staggered board terms reduce directors' accountability and promote

management and board entrenchment. Exemplifying this shift in stance is the following

statistic; in the year 2000, only 37 percent of large-cap S&P 500 companies had annually

elected boards; currently some 83 percent of such firms do.


March 2016 | of 90

The ownership structures of controlled companies typically reduce, if not eliminate,

their vulnerability to an unsolicited change in control, and thus diminish the usefulness

of classified boards as an antitakeover device. Annual elections can, however, serve as a

useful feedback mechanism for boards at controlled as well as non-controlled

companies. Because classified boards provide little benefit to insiders at controlled

companies, it should come as little surprise that relatively few controlled companies

have them. Only 24 percent of controlled firms (versus 24.5 percent in 2012) employ a

classified board, compared with 37.4 percent of non-controlled companies (down from

43.9 percent in 2012). A higher percentage (34.6 percent) of controlled companies with

a single class of stock have classified boards versus controlled companies with multiple

classes of stock (20.3 percent).

Poison Pills and Blank Check Preferred Stock

Poison pills deter unsolicited takeovers by forcing potential acquiring parties to

negotiate with the board or face massive dilution of their stake if specified ownership

levels are exceeded. The prevalence of poison pills, also called shareholder rights plans,

has diminished since 2012. Pills are found at a minority of both controlled and non-

controlled firms, just 7.6 percent and 7.9 percent, respectively, compared with 11.1

percent and 14.2 percent, respectively, in 2012. A higher prevalence of poison pills can

be found at controlled companies with one stock class (11.1 percent) vis-à-vis controlled

firms with multiple stock classes (6.4 percent).

Much like poison pills, blank check preferred stock gained popularity at U.S. firms amid

a wave of hostile takeover activity in the mid-1980s. Companies could place the shares

with a friendly party – a "white knight" – in response to a hostile takeover attempt – or

issue the shares to a friendly party before a tender offer was threatened. Attributes of

the shares were unspecified and could be issued at the board's discretion. While blank

check preferred shares continue to serve as a potential takeover defense, such shares

have generally been used for routine financings. Blank check preferred shares are a

common feature at both controlled companies (81 percent) and non-controlled

companies (93.1 percent), compared with 86.1 percent 94.0 percent, respectively, in

2012. A mere 1.2 percent of non-controlled firms have “declawed” their blank check

preferred shares – meaning that such shares cannot be deployed as a takeover defense

without shareholders’ consent. A higher prevalence of blank check preferred stock is

evident at single-class stock controlled companies (85.2 percent) in contrast with a

prevalence of 79.5 percent at controlled firms with multi-class stock structures.


March 2016 | of 90

FIGURE 26: TAKEOVER DEFENSES BY CONTROL TYPE


Related-Party Transactions

Instances of related-party transactions are observed at controlled companies at a rate

(11.4 percent) more than two-and-a-half times that of non-controlled firms (4.3

percent). In 2012, related-party transactions had a slightly higher occurrence rate (14.8

percent) at controlled firms, as well as a higher prevalence (7.2 percent) at non-

controlled firms. Contrasting related-party transactions at multi-class controlled firms

and single-class stock companies with a controlling shareholder reveals a higher

transaction prevalence at single-class stock controlled firms (14.8 percent) versus at

multi-class stock controlled firms (10.3 percent).

The average value of related party transactions between controlled and non-controlled

firms differed materially. At non-controlled firms the average transaction value is $46.2

million, whereas at controlled firms, the average transaction value is more than five

times as large – $245.7 million, or a difference of $199.5 million. The size of the RPTs is

affected by several large related party transactions at Century Aluminum and Reynolds

American. If one were to disregard the RPTs at those two companies, the average value

of RPTs at controlled firms would be $4.2 million. Both Century Aluminum and Reynolds

American are controlled single-class stock firms, which explains why controlled firms

with a single stock class have an average related party transaction value of $731.5

million compared with an average transaction value at multi-class stock controlled

37

.4%

7.9

%

93

.1%

24

%

7.6

%

81

%

20

.3%

6.4

%

79

.5%

34

.6%

11

.1%

85

.2%

C L A S S I F I E D B O A R D P O I S O N P I L L B L A N K C H E C K P R E F E R R E D S T O C K

CHART TITLE





March 2016 | of 90

companies of $2.7 million. The average transaction values at both non-controlled and

controlled firms in 2012 were markedly lower; $10.1 million and $10.2 million,

respectively, reflecting the need for shareholders to be increasingly vigilant when

assessing the prevalence of transactions of such large magnitudes at controlled firms.

Summary of Distinguishing Governance Features Among Controlled Firms

Governance features at controlled firms with single-class capital structures often differ

from those with multi-class capital structures. Controlled firms with single-class capital

structures tend to straddle the fence between the governance structure of multi-class

stock controlled firms and non-controlled firms, whereas controlled firms with multi-

class capital structures tend to be the outliers.

For example, controlled firms with single-class stock structures generally have higher

average levels of independence on the full board and compensation and nominating

committees than controlled firms with multi-class stock structures, though they

generally trail the independence levels of non-controlled firms. Board attributes at

single-class stock controlled companies – including average board tenure, the

prevalence of firms where at least 25 percent of board members are new, and the

prevalence of boards with at least one financial expert – are closer to that of non-

controlled companies than to multi-class stock controlled entities. Additionally,

controlled firms with a single class of stock have annual elections and majority voting

standards in proportions between those of controlled firms with multi-class capital

structures and non-controlled firms. In terms of takeover defenses, controlled firms

with single-class capital structures more closely resemble non-controlled firms with

respect to the prevalence of supermajority voting requirements to amend the charter or

bylaws and the authorization of blank-check stock, though there are some exceptions,

including, notably, poison pill prevalence. Single-class stock controlled companies also

allow for the right to call special meetings at levels closer to non-controlled firms.

On certain other factors, however, observations deviate from these general findings. For

example, single-class stock controlled companies generally have lower levels of female

and minority representation in the boardroom than at controlled firms with a multi-

class stock structure – whose levels of gender and racial/ethnic diversity tend to be

closer to those at non-controlled firms. Multi-class stock controlled firms also appointed

new board nominees at proportions closest to non-controlled companies compared

with single-class stock controlled companies whose “refreshment” rate (defined as the

percentage of total board seats filled by new nominees) is half that at multi-class

controlled companies. Moreover, with respect to related-party transactions, single-class


March 2016 | of 90

stock controlled firms are found to have a notably higher proportion of firms with such

transactions than at both non-controlled companies and controlled firms with multi-

class stock structures, representing a reversal of sorts from the findings of the 2012

study – which observed that the occurrence of related-party transactions at single-class

stock firms was less than one-half the levels at other controlled firms and at a frequency

slightly above that of non-controlled companies.

Executive Compensation

Disparities between executive compensation at controlled and non-controlled firms are

readily discernible, particularly when CEO compensation is disaggregated from other

Named Executive Officer (NEO) compensation. [NB: All compensation figures represent

compensation reported by S&P 1500 firms for the most recently concluded fiscal year.]

CEO Compensation

Average CEO pay at controlled companies exceeds average CEO pay at non-controlled

firms by $1.5 million, and average CEO pay at controlled firms with multi-class stock

structures exceeds that at non-controlled firms by $3.3 million. Average CEO pay at

controlled companies with single-class stock structures, however, is $3.9 million less

than that at non-controlled companies and $7.2 million less than at multi-class stock

controlled companies, suggesting that CEO pay at controlled firms with egalitarian

voting rights tends to be more tempered than pay at both non-controlled and

controlled firms with differential voting rights.

Median CEO pay at controlled companies is $1.21 million lower than at non-controlled

companies. Median CEO pay at non-controlled firms exceeds that at multi-class stock

controlled companies by a comparable magnitude, $1.16 million, and exceeds that at

single-class stock controlled firms by $2.1 million.

Stock awards represent the largest driver of CEO pay at both controlled companies (34

percent) and non-controlled firms (41 percent). Non-equity incentive plan payouts

(cash-based incentives) are the second highest contributors to CEO pay at non-

controlled firms (18 percent). At all controlled firms as well as at controlled firms with

multiple classes of stock, option awards (whose dollar value represents grant date fair

value) are the next highest contributor of average CEO pay (19 percent - tied with non-

equity incentive plan payouts). However, at controlled firms with a single class of stock,

non-equity incentive plan payouts are the second highest contributor of total average

CEO pay (21 percent) with salary not too far behind (20 percent) – option awards


March 2016 | of 90

represent just 11 percent of the average total CEO pay package, or 8 percentage points

lower than at controlled firms with multiple classes of stock, and 3 percentage points

lower than at non-controlled firms.

Given that CEO pay is largely influenced by firm size, this study also examines and

quantifies the differences in CEO pay between controlled and non-controlled firms

through a company size lens by disaggregating the constituents of the S&P 1500 index

into their respective size-based indices; the S&P 400 Mid Cap firms, the S&P 500 Large

Cap firms, and the S&P 600 Small Cap companies. Average CEO pay is highest at the

large-cap S&P 500 firms and forms the basis for this study’s findings that average CEO

pay at controlled firms in the S&P 1500 composite index surpasses that at non-

controlled firms, and that average CEO pay at multi-class stock controlled companies

vastly outstrips average CEO pay at both non-controlled and single-class stock

controlled firms. At large-cap firms average CEO pay at controlled multi-class stock firms

is 3.5 times higher than that at single-class stock controlled companies and more than

1.7 times that at non-controlled firms, and at mid-cap firms average CEO pay at

controlled multi-class stock firms is 1.4 times higher than that at single-class stock

controlled companies and about equal to that at non-controlled firms, whereas at small-

cap firms average CEO pay at controlled multi-class stock firms is also 1.4 times higher

than that at single-class stock controlled companies and also about equal to that at non-

controlled firms. The ratio of average CEO pay between all controlled firms and non-

controlled companies across large-, mid-, and small-cap indexes is 1.2. At controlled

companies, average CEO pay at large-cap firms exceeds that at mid-cap firms by $13.4

million and that at small-cap firms by $16.8 million. At multi-class stock controlled

companies, large-cap firm average CEO pay exceeds that at mid-cap firms by $15.7

million and that at small-cap firms by $19.1 million. In contrast, at single-class stock

controlled companies, average CEO pay at large-cap firms exceeds that at mid-cap firms

by just $1.4 million and that at small-cap firms by $3.9 million. On the other hand,

average CEO pay at large-cap non-controlled firms outstrips that at mid-cap firms by

$6.1 million and that at small-cap firms by $9.6 million.

The large pay differentials at large-cap firms are primarily due to high pay at media

companies – six of the top 10 highest paid CEOs at multi-class stock controlled firms

oversee media companies. At one Media Company in particular, Discovery

Communications, CEO David Zaslav’s pay package of $169.8 million (of which upwards

of 90 percent comprised equity awards) is almost three times higher than that of the

next highest paid media CEO. In fact, Zaslav was the highest paid CEO in the S&P 1500

universe of firms for the 2014 fiscal year (as reported in 2015 proxy statements) – the

value of his pay package was more than twice that of the next highest paid CEO in the

index. Excluding Zaslav’s compensation, the average CEO pay differentials between


March 2016 | of 90

multi-class stock controlled firms and both non-controlled firms and controlled firms

with a single class of stock in the large-cap category shrinks by $5.9 million.

FIGURE 27: AVERAGE CEO PAY BY CONTROL TYPE & SIZE

As of Most Recent Fiscal Year on 10/25/15

NEO Compensation (excluding CEO pay)

At controlled companies, average Named Executive Officer (NEO) pay (ex CEO) exceeds

that at non-controlled firms by $1.3 million. Average NEO sans CEO pay at controlled

firms with multiple classes of stock exceeds that at non-controlled firms by $2 million.

However, average NEO (ex CEO) pay at controlled firms with a single class of stock is

lower than that at non-controlled firms by $0.81 million – a trend similar to the

observation made for average CEO pay. Similarly, average NEO (ex CEO) pay at multi-

class stock controlled firms exceeded that at controlled firms with one class of stock by

$2.8 million. Median NEO (ex CEO) pay at non-controlled firms exceeds that at

controlled firms by $0.17 million and by $0.73 million at controlled firms with a single

stock class, but is lower by $0.22 million compared with multi-class stock controlled

firms. Median NEO (ex CEO) pay at controlled firms with multiple classes of stock

exceeds that at controlled firms with a singular class of stock by $0.95 million.

The biggest pay drivers of NEO (ex CEO) pay are stock awards (45 percent of total pay at

controlled firms and 39 percent of pay at non-controlled firms) followed by non-equity

$7

,02

0,8

65

$1

3,1

08

,70

7

$3

,55

8,7

55

$7

,68

3,3

92

$6

,60

1,0

02

$2

0,0

33

,30

7

$3

,20

9,3

96

$9

,13

7,3

40

$6

,94

6,9

47

$2

2,6

52

,07

2

$3

,59

7,7

36 $1

0,9

36

,76

9

$5

,00

9,6

60

$6

,41

5,7

30

$2

,50

5,5

30

$3

,73

9,0

55

S & P 4 0 0( M I D C A P )

S & P 5 0 0( L A R G E C A P )

S & P 6 0 0( S M A L L C A P )

S & P 1 5 0 0( C O M P O S I T E )

CHART TITLE



Source: ISS ExecComp Analytics


March 2016 | of 90

incentive plan payouts (18 percent at controlled firms and 17 percent at non-controlled

firms (tied with salary). At single-class stock controlled companies, however, the

proportion of stock awards is the primary contributor to average total NEO sans CEO

pay (48 percent), while the second highest contributor is salary (22 percent), and option

awards represent a fraction of total pay (4 percent) compared with non-controlled firms

(11 percent) and controlled firms with multiple classes of stock (8 percent).

Contrasting the disparity in magnitude between average NEO (ex CEO) pay and average

CEO-only pay reveals a differential of $4.9 million at non-controlled firms, $5.1 million at

all controlled firms, $6.2 million at controlled firms with multi-class stock structures, and

$1.7 million at single-class stock firms with a controlling shareholder.

The ratio of average NEO (ex CEO) pay between all controlled firms and non-controlled

companies across all firms is 1.5. Similar to observations on CEO pay, average NEO (ex

CEO) pay trends vary by firm size. At large-cap firms average NEO (ex CEO) pay at

controlled multi-class stock firms is 2.2 times higher than that at non-controlled firms

and 1.9 times that at single-class controlled companies, and at mid-cap firms average

NEO (ex CEO) pay at controlled multi-class stock firms is 1.8 times higher than that at

single-class controlled companies and 1.2 times that at non-controlled firms. At small

cap firms, average NEO (ex CEO) pay at controlled multi-class stock firms is 1.2 times

higher than that at single-class controlled companies and roughly equal to that at non-

controlled firms. At controlled companies, average NEO (ex CEO) pay at large-cap firms

exceeds that at mid-cap firms by $6.9 million and that at small-cap firms by $8.3 million.

At multi-class tock controlled companies, large-cap firm average NEO (ex CEO) pay

exceeds that at mid-cap firms by $7.5 million and that at small-cap firms by $9 million.

In contrast, at single-class stock controlled companies, average NEO (ex CEO) pay at

large-cap firms exceeds that at mid-cap firms by $3.7 million and that at small-cap firms

by $4.3 million. Average NEO (ex CEO) pay at large-cap non-controlled firms outstrips

that at mid-cap firms by $2.4 million and that at small-cap firms by $3.5 million.


March 2016 | of 90

FIGURE 28: AVERAGE NEO ex CEO PAY BY CONTROL TYPE & SIZE


FIGURE 29: EXECUTIVE COMPENSATION BY CONTROL TYPE


$2

,39

7,1

46

$4

,79

5,7

36

$1

,30

8,2

20

$2

,81

0,9

27

$2

,61

2,4

69

$9

,48

9,5

00

$1

,18

2,8

85

$4

,09

1,4

22

$2

,83

8,2

32

$1

0,3

06

,22

3

$1

,26

8,4

75 $4

,78

3,5

70

$1

,60

7,8

28 $5

,32

4,2

16

$1

,02

4,5

43

$2

,00

1,1

35

S & P 4 0 0( M I D C A P )

S & P 5 0 0( L A R G E C A P )

S & P 6 0 0( S M A L L C A P )

S & P 1 5 0 0( C O M P O S I T E )

CHART TITLE



$7

,68

3,3

92

$2

,81

0,9

27

$3

,81

7,6

47

$5

,66

4,7

24

$1

,90

1,6

46

$2

,30

6,7

68

$9

,13

7,3

40

$4

,09

1,4

22

$5

,12

8,5

27

$4

,46

5,9

86

$1

,73

0,4

79

$2

,00

6,4

99

$1

0,9

36

,76

9

$4

,78

3,5

70

$6

,04

6,5

95

$4

,50

6,6

74

$2

,12

6,4

71

$2

,61

6,3

91

$3

,73

9,0

55

$2

,00

1,1

35

$2

,35

9,7

53

$3

,61

7,0

90

$1

,17

4,9

17

$1

,21

8,6

75

A V G . C E O P A Y A V G . N E O E X C E O P A Y

A V G . N E O ( I N C L . C E O )

P A Y

M E D I A N C E O P A Y

M E D I A N N E O E X C E O P A Y

M E D I A N N E O ( I N C L . C E O )

P A Y

EXECUTIVE COMPENSATION






March 2016 | of 90

Alignment between Controlling and Unaffiliated Shareholders

Voting results from shareholder meetings can be used to measure alignment between

controlling and unaffiliated shareholders. By comparing the overall voting results at

controlled firms as reported to the SEC with those excluding the controlling party's vote,

it is possible to see whether, and to what extent, the votes of controlling and

unaffiliated shareholders differ on a given voting item. The vote results of shareholder

proposals on proxy ballots that were reviewed over a one-, three-, five-, and 10-year

time period generally showed a gap in average shareholder support at controlled versus

non-controlled companies.

Shareholder Proposals at Non-Controlled Companies

At 1,395 non-controlled companies in the S&P 1500 index, 4,599 shareholder proposals

appeared on the ballots of 622 firms (a 45 percent target rate) over the 10-year period

between 2006 and 2015. Forty five percent of these proposals cover governance topics,

19.4 percent address compensation topics, and 35.5 percent relate to environmental

and social (E&S) subjects.

A majority (65 percent) of the governance topic proposals over this time period address

board-related subjects such as independent board chairs, annually elected boards,

majority vote standards, cumulative voting, establishment of specific board committees,

director qualifications, proxy access, and succession planning. Half of the compensation

proposals are performance-based-pay related addressing topics such as stock retention

by executives, use of performance-based (versus time-based) equity awards, adoption

of pay for superior performance standards, golden coffins, gross-up payments,

clawbacks, pro-rata (versus auto-accelerated) vesting, and bonus deferrals. Most (28

percent) of the E&S shareholder resolutions address corporate political activities –

primarily political contributions and lobbying activities and expenditures.

Average support for all proposals in the aggregate, over the 10-year period, is 34.1

percent and average shareholder support is highest for governance proposals followed

by compensation and then E&S proposals. Average investor support for governance and

compensation topic shareholder proposals has remained relatively steady over the

review period, whereas average support for E&S proposals showed an increase in 2011

(to 20.8 percent average support from 13 percent average support in 2006) though

average support for E&S proposals has not shown much variation in the intervening

years. Overall, 52.2 percent of the proposals on ballot over the last 10 proxy seasons

have received significant (at least 30 percent) support; the proportion of governance,


March 2016 | of 90

compensation, and E&S shareholder proposals receiving at least 30 percent support is

73.7 percent, 55.6 percent, and 23.1 percent, respectively.

Shareholder Proposals at Controlled Companies

At the 105 controlled companies identified, 317 proposals have appeared on ballots at

38 distinct companies (36 percent of controlled firms) during the 10-year period

spanning 2006 through 2015. Of these proposals, 37 percent were governance topic

proposals, 16 percent were proposals on compensation subjects, and 47 percent of the

resolutions addressed E&S issues. These findings reveal a lower prevalence of

governance and compensation topic proposals (by roughly 8 and 3 percentage points,

respectively) at controlled firms vs. non-controlled firms, but a higher occurrence of E&S

proposals than at non-controlled firms (11.5 percentage points higher). The lion’s share

(41 percent) of governance issue proposals sought board related reforms. A majority (53

percent) of compensation topic proposals espoused performance-based pay practices

and policies. Similar to non-controlled companies, the most prevalent topic addressed

by the E&S proposals was political activity subject matter (representing 22 percent of all

E&S proposals).

A third (39) of all governance topic shareholder proposals voted on by shareholders at

controlled firms over the 10-year review period sought the approval of a recapitalization

plan to allow for all stock to have one vote per share. Only two passed (at Stewart

Information Services in 2015 and at Telephone and Data Systems in 2009), and one

other proposal (at News Corp. in 2015) came close to receiving a majority vote with 49.5

percent shareholder support. In all, 7.7 percent of the proposals received between 40

and 49 percent support (40s), 28.2 percent of the proposals drew support in the 30s,

38.5 percent of the proposals garnered support in the 20s, and 18 percent of the

proposals won less than 20 percent support. Excluding the proposal vote result at

Stewart Information Services, where the board issued no vote recommendation to

shareholders, the recapitalization proposals received 29.1 percent average support.

Average support for all shareholder proposals at controlled companies over the study

period is 18.7 percentage points lower than at non-controlled firms. Average support

for governance topic, pay related and E&S issue shareholder resolutions is lower than at

non-controlled firms by 21.1, 17.6, and 11.6 percentage points, respectively.


March 2016 | of 90

FIGURE 30: SHAREHOLDER PROPOSAL AVERAGE SUPPORT BY CONTROL TYPE

Proposal Data from 2006 – 2015 as of 10/25/15

Institutional Shareholder Views

In the summer of 2015, ISS surveyed a broad swath of its institutional investor client

base. The questions covered both companies controlled through dual-class capital

structures with unequal voting rights as well as those controlled through majority

ownership of a single class of shares. One hundred and fourteen institutional investors

representing 109 organizations responded to the survey. The highest proportion (29

percent) of institutional survey respondents represented over $100 billion in assets

owned or under management, followed by 19 percent of institutions with between $1

billion and $10 billion in assets (tied with 19 percent of investor respondents with

between $10 billion and $100 billion in assets), then 14 percent with between $100

million - $500 million in assets, 6 percent with under $100 million in assets and 3

percent of institutions had between $500 million and $1 billion in assets. A conservative

estimate of the total assets under management represented by institutional investor

survey respondents is at least $4.2 trillion.

34

.1%

46

.5%

33

.2%

18

.9%

15

.4%

25

.4%

15

.6%

7.3

%

15

.1%

23

.8%

13

.8%

6.4

%

16

%

30

.6%

17

.9%

8.7

%

A L L T O P I C S G O V E R N A N C E T O P I C S

C O M P E N S A T I O N T O P I C S

E & S T O P I C S

AV

ERA

GE

SUP

PO

RT



Source: ISS Voting Analytics Database


March 2016 | of 90

Participants were asked whether they distinguish between controlled and non-

controlled companies when making investment decisions and/or proxy voting decisions.

Roughly 65 percent of investors responded to the question; of those who responded, 56

percent stated that they do make such distinctions.

Investors who indicated that they distinguish between controlled and non-controlled

companies in proxy voting decisions elaborated to state that their evaluation of such

items as director independence, compensation, related-party transactions, takeover

defenses, and stock ownership guidelines differs in the two situations, with several

investors indicating that directors of controlled companies are more likely to be

entrenched.

Investors who said they distinguish between controlled and non-controlled companies

when making investment decisions commented that the presence of a controlling

shareholder would result in closer attention paid to board composition and the

protection of minority shareholder rights, or, in some cases, result in a decision to

forego the investment altogether. An asset manager stated that if a particular proposal

or board appointment appears to contravene shareholder rights, it would be more likely

to trigger an "against" vote at a company with a controlling shareholder, and this was

echoed by another asset manager who indicated that controlled companies would have

a greater "burden of proof". Another asset management firm characterized itself as

"more skeptical of proxy questions" at controlled companies. On the other hand, several

investors indicated that they were willing to accept a lower level of board independence

at a controlled company.

Some investors indicated that the behavior and reputation of the controlling party could

influence whether to proceed with the investment, and that an evaluation of the

controlling party is as important as an evaluation of the management team. Others

commented that valuation models and price targets are adjusted for controlled

companies. One asset owner said that its policy is to purchase voting shares of

companies with dual-class structures even when the non-voting shares are typically held

in the index that it tracks.

Those investors who stated that they distinguish between controlled and non-controlled

companies were also asked if they treat controlled companies differently depending on

the mechanism of control. A slight majority of those answering the question indicated

that they do not do so, because, in the words of one asset manager, "control is control

regardless of the mechanism." However, a number of investors stated that control via

super-voting shares is considered much more problematic than control via majority

ownership, as the latter ensures an alignment of economic interests among

shareholders while the former does not. One asset manager commented that if a


March 2016 | of 90

company is controlled via majority ownership then the outside directors would be

considered independent, while if the company is controlled via a dual-class capital

structure the outside directors would not be deemed independent. Another investor

commented that while the mechanism of control per se was not a factor, the transition

features (such as sunset provisions) of a controlled company are worthy of attention.

Next, participants were asked whether they engaged with controlled companies to a

larger extent than non-controlled companies. Hardly any differentiated; 96 percent of

investors indicated that they do not engage more with controlled companies than with

non-controlled companies. And participants were asked whether they would

characterize their experience engaging with controlled companies as more or less

constructive or productive than engagements with non-controlled companies. A

minority (36.4 percent) of investors chose to characterize their engagement with

controlled companies as either more or less constructive or productive than their

engagement with non-controlled companies; of those, 91 percent characterized their

engagement with controlled companies as "less constructive/productive."

A few investors indicated that the factors determining whether engagement is

successful differ from company to company and do not simply depend on whether the

company is controlled. One asset manager who described engagement with controlled

companies as more constructive commented that "large insider owners often have

interests aligned with shareholders," suggesting that the mechanism of control is an

important factor. However, a more common view was that because controlling

shareholders can safely disregard the views of minority shareholders, it takes more time

to bring about change through engagement, and companies are "generally less inclined

to offer up positive governance changes." Another asset manager stated that "we

generally do not engage with controlled companies [controlled by means of dual-class]

because it is fruitless," while another asset manager commented that "there is

inherently less leverage when engaging with controlled companies," and a pension fund

opined that "controlled companies employ a 'take it or leave it' approach."

The findings from ISS’ 2015 institutional investor survey are consistent with the findings

from the 2012 study in which institutional investors, whose feedback was sought to gain

insight into their policies and experiences regarding controlled companies, reported

that their experiences with respect to investing in controlled companies have differed

from those with non-controlled firms, particularly in the area of engagement. A majority

of respondents indicated that controlled companies tend to be less responsive or

conduct less outreach than their non-controlled counterparts, with most investors

attributing this to the certainty of vote results at controlled companies, which may


March 2016 | of 90

naturally engender low expectations at controlled companies and perhaps a greater

reluctance by investors to engage with them.

In 2012 sentiments were also expressed that disclosure tends to be weaker and

engagements more unproductive at controlled companies, and that markets may

discount shares of controlled companies. Some respondents, however, expressed that

no distinctions were made between investments in controlled vs. non-controlled

companies. Others acknowledged such differences, and a number indicated that, while

formal policies guiding investments or engagements with controlled companies may not

exist, the controlled status of a firm may be factored into the investment process, and

may include, under some circumstances, investment avoidance. Some investors stated

that their voting policies generally reflect a preference for the "one-share, one-vote"

principle.

Recent Trends

The Recent IPO Market

The 2012 study examined firms which went public from Jan. 1, 2010, through March 28,

2012, and found that 170 U.S. companies had conducted an initial public offering and

held a shareholder meeting, including 48 (28.2 percent) which were controlled

companies, 20 (11.8 percent) of which featured a multi-class capital structure with

unequal voting rights and 28 (16.5 percent) that had a single class of stock and a party

controlling at least 30 percent of the shares outstanding. The 2012 study found that the

Diversified Financials and Retailing industry groups had the highest number of recently

public controlled firms, followed by the Energy industry, and that the median market

capitalization of recently public controlled firms was nearly twice that of their non-

controlled peers. The 2012 study also observed that recently IPOed controlled firms

exhibited many of the same traits as older controlled firms, including lower average

levels of board and committee independence, comparatively fewer instances of

supermajority voting requirements to approve mergers and amendments to governing

documents, and a higher prevalence of material weaknesses than non-controlled firms.

This follow-up study examines firms that have gone public from March 29, 2012 to

October 25, 2015, with the finding that 463 U.S. firms have conducted an initial public

offering and held a shareholder meeting, including 110 (23.7 percent) controlled

companies – 33 (7.1 percent) of which featured a multi-class capital structure with

unequal voting rights and 78 (16.8 percent) firms with a single class of stock and a


March 2016 | of 90

shareholder controlling at least 30 percent of outstanding shares. In other words,

contrary to the popular narrative of controlled companies proliferating via IPOs, the

proportion of IPO companies which are controlled has decreased by approximately 4.5

percentage points, with the decrease largely attributable to a drop in the proportion of

firms that went public with a dual-class stock structure (a decrease of 4.6 percentage

points for all IPO companies compared with 2012). However, the median capitalization

of recently public controlled firms is still about twice (2.2 times) that of non-controlled

recently public firms. The top three industry groups with the most prevalent recently

public controlled firms are the Pharmaceuticals, Biotechnology & Life Sciences, Health

Care Equipment & Services, and Diversified Financials and Software & Services (tied in

third place), representing a different mix from the 2012 study.

In terms of governance, recently public controlled firms continue to exhibit many of the

same traits as older controlled firms, including lower average levels of board and

committee independence. Further, relative to non-controlled firms, controlled

companies have a comparatively lower prevalence of supermajority voting

requirements for amendments to governing documents (19 percentage point

difference) and to approve mergers (1.7 percentage point differential), and marginally

higher levels of material weaknesses (1 percentage point difference). The proportion of

controlled firms that have charter-related supermajority vote requirements is higher

than those with bylaw-related supermajority vote requirements by 13.7 percentage

points. The prevalence of firms with the right to act by written consent is significantly

higher in the controlled company group than the non-controlled group (34.6 percentage

point difference), as is the prevalence of controlled firms with the right to call a special

meeting (15.9 percentage point difference).

FIGURE 31: RECENT IPO (3/29/12 TO 10/25/15) STATISTICS BY CONTROL TYPE

As of 10/25/15

2015 2012

Ownership Type Controlled Non-Controlled Controlled Non-Controlled

# Firms 110 352 48 122

Median Market Capitalization

$970.9 million $445.5 million $617.8 million $322.4 million

Avg. Board Independence 57.0% 73.6% 60.4% 75.3%

Written consent Prevalence 44.5% 9.9% 45.8% 4.9%

Material Weakness Prevalence

1.8% 0.9% 6.3% 4.2%

Source: ISS QuickScore Database, Compustat


March 2016 | of 90

Some of the recently public controlled firms, particularly those with a single class of

common stock, will cease to be controlled in the coming years, as controlling

shareholders, especially venture capital and private equity firms, reduce their

ownership interests. As these firms transition from their newly public ownership

structure to a more dispersedly-held structure they may well add independent board

members and consider other changes to their governance structures.

Perspectives on Recent IPOs

Conversations with representatives of investment banks who have been involved in

initial public offerings and spinoffs of controlled firms reveal that most recently public

controlled companies were backed primarily by venture capital and/or private equity

firms and that such firms now typically have single-class capital structures, compared

with founders or individuals who more often favor multi-class stock structures to

preserve control. Those entities taking firms public with a controlled status typically

view controlled company exemptions under exchange listing rules as a free option, and,

as such, most do not hesitate to take advantage of such exemptions given that their

boards include a significant number of investor representatives. Most of these firms

going public do not remain controlled indefinitely; private equity and venture capital

investors rarely maintain controlling stakes in public firms, often winding down their

ownership stakes within the first few years following the initial public offering. Recently

public firms with a single-class capital structure often include boards with several

private equity firm representatives and frequently feature governance provisions not

friendly to investors or not considered best practice; e.g. classified boards, plurality vote

standards, and relatively low board independence. Some newly public single-class stock

controlled firms signal to potential investors their plans to transition to a more

shareholder-friendly governance structure with independent directors. Given that

prospective investors oftentimes raise concerns about companies’ intended governance

structures during roadshows, firm representatives may suggest a prospective increase

of board independence levels and/or enactment other governance reforms within the

first few years following the IPO.

On the other hand, firms that elect to go public with a multi-class capital structure to

ensure control generally desire to remain controlled long-term. The desire of a founder

to maintain control and tax benefits are usually the two primary reasons for opting for

this form of control structure. With respect to preserving control, founder/CEOs who

select a controlling structure often expect to be involved in the business for many years

to come and simply wish to run it with minimal outside interference. As for tax


March 2016 | of 90

implications, many of the spinoffs that occurred during the last decade were structured

as controlled companies in order to minimize taxes that might otherwise result.

Efforts to Create/Eliminate Controlling

Mechanisms

In recent years, the number of firms that have sought to create new classes of common

stock has outpaced those seeking to eliminate such classes. Since the beginning of 2012,

24 board proposals to create new classes of stock have appeared on proxy ballots at 23

firms. While a majority of the proposals to create new classes of stock since 2012 have

been approved, Alphabet Inc. (formerly Google) is the only controlled firm to have

sought and received shareholder approval of a new class of non-voting stock. The firm is

still controlled by its two founders, and the class of non-voting shares approved by

shareholders could serve to perpetuate the firm's controlled status. Biglari Holdings

initially sought investor approval for the creation of a new class of common stock with

inferior voting rights relative to economic rights in 2012. That effort was criticized for

not offering external investors sufficient protection against CEO Sardar Biglari (already

the largest shareholder with a 15 percent stake at the time) potentially obtaining a

controlling interest; the company ultimately terminated this effort amid investor

scrutiny.

By comparison, 18 board-sponsored proposals seeking the elimination of a class of

common stock have appeared on the ballots of 12 firms. Six of the firms have collapsed

their multi-class capital structure into one class of stock, and the remaining firms

eliminated classes of stock for which there were no outstanding shares. Proposals to

create new classes of common stock received 92.3 percent support on average,

whereas proposals to eliminate a class of stock drew 98.9 percent support on average.

Recent shareholder-led efforts to dismantle controlling mechanisms have been largely

unsuccessful. Since the beginning of 2012, investors have voted on 35 shareholder

proposals to eliminate multi-class stock structures, only one of which passed (in 2015 at

Stewart Information Services where the board did not issue any recommendation for

how shareholders should vote – the firm’s board subsequently announced, on Jan. 27,

2016, in response to shareholder support for the proposal, the company’s plans to

exchange class B stock for common stock, thereby eliminating the dual class capital

structure). Investor support for the proposals over this four-year period has averaged

30.2 percent support, with the highest average support of 34.9 percent occurring in


March 2016 | of 90

2015 – which is the highest average support has been for such shareholder proposals

since 2009. In terms of proposal volumes between 2012 and 2015, over 60 percent of

the proposals were voted on by shareholders in just two years; 2014 and 2015. The 22

proposals collectively voted on in these two years represent 30 percent of all proposals

voted on since the year 2000, suggesting that, in recent years, shareholder advocates

have stepped up their “one-share, one-vote” efforts.

Controlled Companies: A Review of Global

Trends/Characteristics

Controlled companies tend to be more frequently represented in global equity markets

other than in the United States, although the legal as well as practical definitions of

"control" vary widely between jurisdictions. Control is generally defined according to

voting rights, share capital, potential and/or actual board representation, or a

combination thereof. For example, while the French definition of control may be

triggered either through an external party controlling a majority of voting rights,

designation of a majority of board or executive positions, or otherwise exerting a

dominant influence through contracts, the Italian definition is limited to a control of

voting power either in general or at a particular general meeting. Moreover, the precise

ownership percentage at which a company is considered controlled varies somewhat

between markets. Japan, for example, requires that 40 percent of equity be owned by

an outside party in order for a company to be considered controlled.

Regardless of a given jurisdiction's definition, overseas controlled companies are

generally owned by either a family, national or sub-national state, or network of

companies affiliated through cross-ownership. While such ownership structures may

prompt caution among some investors, and especially if accompanied by control-

enhancing mechanisms such as super-voting shares, they have often endured because

of the concerned companies' systemic importance to the local economy. Conversely,

however, while the U.S. corporate governance discussion tends to focus on imposing

checks and balances on management boards that are empowered by comparatively

diffuse ownership structures, elsewhere the debate tends to focus on minority

shareholder protection. Nevertheless, there is a mounting interest in Europe in so-called

"loyalty shares," where increased voting rights accrue through long-term investment.

France, Italy, and the Netherlands have either instituted such a system or are in the

process of considering it. The most notable example of such legislation is France's

Florange Act, which, in the case of registered shares of companies listed on a regulated


March 2016 | of 90

market, effectively converted the acquisition of double voting rights stemming from

long-term investment from an opt-in system to an opt-out system.

Particularly in Europe, families often exert influence through a trust or other investment

vehicle where it is expected that the family members have a common view on voting

matters and will vote as a block; in certain instances, such as the Saverys family of

Belgium, different family members have not declared themselves to be an official

consortium despite together holding a substantial portion of share capital in such

companies as CMB, Exmar, and Euronav. In Sweden, the Wallenberg family has pooled

the holdings of three foundations into the private company FAM AB, which, through the

listed investment vehicle Investor AB, exercises magnified control over companies such

as Telefonaktiebolaget LM Ericsson, Atlas Copco, and Electrolux using a pyramid

ownership structure where each of the two tiers has a dual-class capital structure. Two

side effects of such arrangements, which also occur in markets such as Italy, are a

comparatively heightened number of directors serving on a multitude of boards, and

cross-directorships.

European state-owned companies can mostly be found within industries that are

considered systemically critical to the local economy, such as raw materials,

telecommunications, and defense. The defense contractor Airbus Group SE (formerly

the European Aeronautic Defence and Space Company NV) is indirectly owned by the

French, German, and Spanish states. More generally, Deutsche Telekom, TeliaSonera,

and Proximus are examples of former wholly state-owned telecommunications

companies where their respective national governments continue to hold a substantial

equity stake. Automobile manufacturer Volkswagen AG, recently in the news due to

manipulation of emissions readings, represents a fairly unique case of a company; it is

approximately 50-percent owned by the Porsche family through Porsche Automobil

Holding SE, and 20-percent owned by the German State of Lower Saxony. There is,

however, a trend in Europe for states to divest from non-critical industries, or to exert

influence at arm’s length through shareholder executive agencies. In contrast, state

ownership in China exists across a broader spectrum of industries, with the Chinese

central government exercising a higher degree of control than its European

counterparts through vehicles such as the China National Petroleum Corporation,

although reforms aiming to decentralize this control are on the horizon.

The Japanese economy is emblematic of a particular type of cross shareholdings,

dubbed the "keiretsu" system. Under this system, a wide range of companies are

grouped around a single bank, with examples including the Mitsubishi, Mitsui, and

Sumitomo keiretsu. While comparable systems exist in other markets, Japan is unique in

terms of their number, size, and importance. In this vein, Japan's Corporate Governance


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Code requires companies to disclose their policies on cross shareholdings. While such

cross shareholdings have declined markedly since the 1990s, a substantial 17 percent of

Japanese companies are considered to be controlled, albeit not necessary as part of a

cross shareholdings structure.

Conclusion

The findings of this study are consequential for both investors and board members at

controlled firms. The findings show that control matters. This study also shows that not

all controlled firms are created equal. At least in the United States, the control

mechanism matters. Controlled companies featuring multiple classes of stock generally

underperformed on a broad swath of financial metrics over the long term, are perceived

as having more financial risk, and offer fewer rights to unaffiliated shareholders than

dispersedly owned firms. By contrast, firms in which the controlling party's voting

power and economic power are aligned outperform other controlled companies in

some respects while offering unaffiliated shareholders comparatively more rights. While

these are directional conclusions and there are exceptions, these findings challenge

claims by advocates of controlled firms that such structures ultimately benefit all

shareholders. While insiders may favor the combination of public market liquidity with

private market autonomy, it does not appear that external shareholders necessarily

benefit from this tradeoff.

Study Methodology

The study examines firms in the S&P 1500 Composite Index as of July 31, 2015. A

number of recently public index constituents had not yet held an annual meeting and

have limited corporate governance information, but have financial data available. In

addition, certain data were not available for some closely held firms that do not file a

Form DEF 14A (proxy statements) with the SEC. Inputs of note in this study includes a

survey of institutional investors on questions germane to controlled entities and

feedback from a number institutional investors and investment banks to provide

context for the study’s findings – such comments from these exercises have been

stripped of identifying information to preserve confidentiality and to allow for

maximum freedom to comment on the relevant subjects.


March 2016 | of 90

A controlled company is generally defined as one in which an individual or a group

collectively owns a majority of a firm's voting stock, or is entitled to elect a majority of

directors. However, this definition does not take into account firms with owners of

substantial but non-majority stakes that enable these investors to effectively control

voting outcomes at these firms. These investors are often founders or executives,

whose stakes are magnified by their insider status as well as by non-participation in the

voting process by certain shareholders. In addition, the standard definition of a

controlled company does not include shareholders with a common link – such as family

members and co-founders – who may effectively exercise control over voting results by

acting in concert. In practice, there is no bright-line test for "control." Therefore, we

have broadened the definition of control to include any person or group owning 30

percent or more of a company's voting power; in selecting 30 percent as a threshold for

control, we considered that the major U.S. exchanges assume that a change of control

has occurred in certain cases when a party acquires as little as 20 percent of the voting

power. In addition, at firms where a person or group has the ability to elect a substantial

number (40 percent or more) of the board, that party will be considered a controlling

party for the purposes of this study.

Note that director independence has been defined as independence under ISS' 2015

U.S. Proxy Voting Guidelines, which differ in several respects from SEC and stock

exchange guidelines. Data related to executive compensation have been provided by

ISS' ExecComp Analytics and may differ in some respects from disclosure in a firm's

proxy materials.

http://www.issgovernance.com/file/policy/1_2015-us-summary-voting-guidelines-updated.pdf

http://www.issgovernance.com/file/policy/1_2015-us-summary-voting-guidelines-updated.pdf


March 2016 | of 90

Appendix: Controlled Firms

in the S&P 1500 Composite Index

Company Index Industry Multi-class

Capital Structure?

Ownership Note

A. O. Smith Corporation S&P 400 Capital Goods Yes The Smith family controls 95.6 percent of Class A Stock that is entitled to elect a majority of the board.

Agilysys, Inc. S&P 600 Technology Hardware & Equipment

No MAK Capital One, LLC owns 30.9 percent of the firm's common stock.

Albany International Corp.

S&P 600 Capital Goods Yes The Standish family controls 69 percent of the company's common stock.

Alphabet Inc. S&P 500 Software & Services Yes Co-founders control 54.3 percent of the voting power.

AMC Networks Inc. S&P 400 Media Yes

The Dolan family controls 65.8 percent of the voting power and Class B Stock that is entitled to elect a majority of the board.

Apollo Education Group, Inc.

S&P 400 Consumer Services Yes Affiliates control a majority of the voting stock by way of a voting trust.

Bel Fuse Inc. S&P 600 Technology Hardware & Equipment

Yes

The Bernstein family controls 35.5 percent of the voting power given that the voting rights of two large shareholders are currently suspended.

Berkshire Hathaway Inc. S&P 500 Diversified Financials Yes Warren Buffet controls 33.9 percent of the voting power.

Bio-Rad Laboratories, Inc. S&P 400 Pharmaceuticals, Biotechnology & Life Sciences

Yes

The Schwartz family controls more than 50 percent of the voting power and Class B Stock that is entitled to elect a majority of the board.

Brady Corporation S&P 600 Commercial & Professional Services

Yes The Brady family controls all of the voting stock.

Broadcom Corporation S&P 500 Semiconductors & Semiconductor Equipment

Yes Co-founders control 47 percent of the voting power.

Brown-Forman Corporation

S&P 500 Food Beverage & Tobacco

Yes The Brown family controls 67.4 percent of all the voting stock.

Cablevision Systems Corporation

S&P 500 Media Yes

The Dolan family controls 72.3 percent of the voting power and Class B Stock that is entitled to elect a majority of the board.

Calamos Asset Management, Inc.

S&P 600 Diversified Financials Yes

The Calamos family controls 97.4 percent of the voting power and Class B Stock that is entitled to elect a minority of the board.


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Capital Structure?

Ownership Note

CalAtlantic Group, Inc. S&P 600 Consumer Durables & Apparel

No

MatlinPatterson CA Homes LLC controls 49 percent of the voting power at the firm, which was formerly known as the Standard Pacific Co.

Cal-Maine Foods, Inc. S&P 600 Food Beverage & Tobacco

Yes Founder Fred Adams controls 52.5 percent of the voting power.

CBS Corporation S&P 500 Media Yes

Founder/Executive Chair Sumner Redstone controls 79.6 percent of the voting stock though his ownership interest in National Amusements.

Central Garden & Pet Company

S&P 600 Household & Personal Products

Yes

Founder/Chair and ex-CEO William Brown controls 55.8 percent of the voting power and almost all the Class B super-voting stock.

Century Aluminum Company

S&P 600 Materials No Glencore AG owns 42.9 percent of the firm's common stock.

Comcast Corporation S&P 500 Media Yes

The Roberts family owns all Class B Stock that assures control of a non-dilutable 33.3 percent of the voting power of the firm’s two classes of voting stock.

CONSTELLATION BRANDS, INC.


Yes

The Sands family controls all Class B super-voting stock and 58 percent of the combined voting power of Class A Stock and Class B Stock.

CorVel Corporation S&P 600 Health Care Equipment & Services

No Co-founder Jeffrey Michael owns 37.5 percent of the firm's common stock.

Diamond Offshore Drilling, Inc.

S&P 500 Energy No The Loews Corporation owns 53.1 percent of the firm's common stock.

Dick's Sporting Goods, Inc.

S&P 400 Retailing Yes CEO Edward Stack controls 61.8 percent of the voting power

Discovery Communications, Inc.

S&P 500 Media Yes John C. Malone and Advance/Newhouse Programming Partnership control 47 percent of the voting power.

DreamWorks Animation SKG, Inc.

S&P 400 Media Yes

CEO Jeff Katzenberg controls 60.9 percent of Class A Stock's voting power and 59.8 percent of Class B super-voting stock's voting power.

Eaton Vance Corp. S&P 400 Diversified Financials Yes All the voting stock is closely held by way of a voting trust.

Equity One, Inc. S&P 400 Real Estate No Gazit-Globe, Ltd., controlled by Chair/CEO Chaim Katzman, owns 43.1 percent of the firm's common stock.

Expedia, Inc. S&P 500 Retailing Yes

Barry Diller and Liberty Interactive Corporation control 60 percent of the voting power and all of the Class B super-voting stock.


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Capital Structure?

Ownership Note

EZCORP, Inc. S&P 600 Diversified Financials Yes Philip Cohen owns all the voting (Class B) stock.

Facebook, Inc. S&P 500 Software & Services Yes Founder/CEO Mark Zuckerberg controls 60.1 percent of the voting power.

Federated Investors, Inc. S&P 400 Diversified Financials Yes The founding Donahue family controls all the voting (Class A) stock.

Ford Motor Company S&P 500 Automobiles & Components

Yes The Ford family controls 40 percent of the voting power.

Forrester Research, Inc. S&P 600 Software & Services No Founder George Colony controls 44 percent of the firm's common stock.

FTD Companies, Inc. S&P 600 Retailing No Liberty Interactive Corporation controls 35.6 percent of the firm's common stock.

FutureFuel Corp. S&P 600 Materials No Chair/CEO Paul Novelly controls 40.5 percent of the firm's common stock.

General Growth Properties, Inc.

S&P 500 Real Estate No

Brookfield and its affiliates control 39.8 percent of the firm's common stock; the board includes three Brookfield designated directors.

Graham Holdings Company

S&P 400 Consumer Services Yes Donald Graham controls 87.9 percent of Class A Stock that is entitled to elect two-thirds of the board.

Greif, Inc. S&P 400 Materials Yes Members of the Dempsey family collectively control more than 74 percent of Class B voting stock.

Haverty Furniture Companies, Inc.

S&P 600 Retailing Yes The Haverty family controls more than 73 percent of Class A Stock that is entitled to elect a majority of the board.

Heartland Express, Inc. S&P 600 Transportation No The Gerdin family controls more than 40 percent of the firm's common stock.

HSN, Inc. S&P 400 Retailing No Liberty Interactive Corp. controls 38 percent of the firm's common stock.

Hub Group, Inc. S&P 600 Transportation Yes The Yeager family controls 60 percent of the voting power.

Hubbell Incorporated S&P 400 Capital Goods Yes Family trusts control 48.7 percent of Class A super-voting stock (20 votes per share).

Interactive Brokers Group, Inc.

S&P 600 Diversified Financials Yes Founder/CEO Thomas Peterffy controls 85.5 percent of the voting power.

International Speedway Corp.

S&P 400 Consumer Services Yes The France family controls over 72 percent of the voting power.

John Wiley & Sons, Inc. S&P 400 Media Yes The Wiley family controls approximately 88 percent of Class B Stock that is


March 2016 | of 90


Capital Structure?

Ownership Note

entitled to elect a majority of the board.

Kelly Services, Inc. S&P 600 Commercial & Professional Services

Yes Executive Chair Terence Adderley controls 93 percent of all the voting (Class B) stock.

Lamar Advertising Company

S&P 400 Real Estate Yes The Reilly family controls a majority of the voting power.

Lennar Corporation S&P 500 Consumer Durables & Apparel

Yes The Miller family controls a majority of Class B super-voting stock (10 votes per share).

Lithia Motors, Inc. S&P 600 Retailing Yes DeBoer family controls all super-voting Class B shares, which constitute 52 percent of the voting power.

ManTech International Corporation

S&P 600 Software & Services Yes Co-founder/CEO George Pedersen owns all super-voting Class B shares, which constitute 84.4 percent of voting power.

MERCURY GENERAL CORPORATION

S&P 400 Insurance No

Founder/Chair/ex-CEO George Joseph and Gloria Joseph jointly control more than 50 percent of the firm's common stock.

Meredith Corporation S&P 400 Media Yes The Meredith family controls more than 50 percent of the voting power.

MicroStrategy Incorporated

S&P 600 Software & Services Yes Founder/CEO Michael Saylor controls 68 percent of the voting power.

Molson Coors Brewing Company


Yes The Molson and Coors families control 92.5 percent of Class A Stock that is entitled to elect a majority of the board.

Monro Muffler Brake, Inc. S&P 600 Retailing Yes

Peter Solomon controls Class C Preferred Stock which has effective veto power over all matters voted on by common shareholders.

Moog Inc. S&P 600 Capital Goods Yes Moog benefit plans control over 76 percent of Class B Stock that is eligible to elect a majority of the board.

Movado Group, Inc. S&P 600 Consumer Durables & Apparel

Yes The Grinberg family controls a majority of the voting power.

MSC Industrial Direct Co., Inc.

S&P 400 Capital Goods Yes Board Chair and ex-CEO Mitchell Jacobson controls 43.4 percent of the voting power.

National Presto Industries, Inc.

S&P 600 Capital Goods No Chair/CEO MaryJo Cohen controls approximately 30 percent of the company's common stock.

News Corporation S&P 500 Media Yes The Murdoch family controls 39.4 percent of the voting (Class B) stock.

NIKE, Inc. S&P 500 Consumer Durables & Apparel

Yes

Co-founder/Chair Philip Knight controls more than 82 percent of Class A Stock that is entitled to elect a majority of the board.


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Capital Structure?

Ownership Note

Ralph Lauren Corporation S&P 500 Consumer Durables & Apparel

Yes

Founder/Chair/CEO Ralph Lauren controls all the Class B super-voting stock and 81.3 percent of the voting power.

Republic Services, Inc. S&P 500 Commercial & Professional Services

No William H. Gates III controls 30.9 percent of the firm's common stock.

Reynolds American Inc. S&P 500 Food Beverage & Tobacco

No British American Tobacco P.l.c. controls 42 percent of the firm's common stock.

ROLLINS, INC. S&P 400 Commercial & Professional Services

No Chair Randall Rollins and his brother, CEO Gary Rollins, control more than 50 percent of the firm's voting power.

SAUL CENTERS, INC. S&P 600 Real Estate No Chair/CEO Francis Saul II controls over 40 percent of the firm's common stock.

Scholastic Corporation S&P 600 Media Yes The Robinson family controls all Class A Stock which is entitled to elect a majority of the board.

Scientific Games Corporation

S&P 600 Consumer Services No Chair Ronald Perelman controls approximately 40 percent of the firm's common stock.

Scripps Networks Interactive, Inc.

S&P 500 Media Yes

The Scripps family trust controls 91.9 percent of Common voting shares which are entitled to elect two-thirds of the board.

Seneca Foods Corporation S&P 600 Food Beverage & Tobacco

Yes The founding family controls over 30 percent of the voting power.

Skechers U.S.A., Inc. S&P 400 Consumer Durables & Apparel

Yes

The Greenberg family and trusts associated with it control 45.9 percent of Class B super-voting stock or approximately 72 percent of the firm's voting power.

Sonic Automotive, Inc. S&P 600 Retailing Yes Founder/CEO Bruton Smith controls 69.6 percent of the voting power.

Stein Mart, Inc. S&P 600 Retailing No Chair/CEO Jay Stein controls 32.8 percent of the company's common stock.

Stewart Information Services Corporation

S&P 600 Insurance Yes The Morris Family is entitled to elect four of the nine board members.

Talen Energy Corp S&P 400 Utilities No

Riverstone Holdings LLC owns 35 percent of the company's common stock and has entered into a voting agreement to designate 2 directors.

Telephone and Data Systems, Inc.

S&P 400 Telecommunication Services

Yes

The Carlson family controls over 94 percent of Series A Common Stock which is entitled to elect a majority of the board.

TeleTech Holdings, Inc. S&P 600 Software & Services No Chair/CEO Kenneth Tuchman controls 65.1 percent of the firm's stock.


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Capital Structure?

Ownership Note

The Boston Beer Company, Inc.


Yes Founder/Chair James Koch owns all Class B shares that are entitled to elect a majority of the board.

The Buckle, Inc. S&P 600 Retailing No Chair/ex-CEO Daniel Hirschfeld controls 33.4 percent of the firm's common stock.

The Cato Corporation S&P 600 Retailing Yes CEO John Cato controls 41.1 percent of the voting power.

The E. W. Scripps Company

S&P 600 Media Yes The Scripps family controls 93.3 percent of Common voting shares which are entitled to elect two-thirds of the board.

The Estee Lauder Companies Inc.

S&P 500 Household & Personal Products

Yes The Lauder family controls 84 percent of the voting power.

The Hershey Company S&P 500 Food Beverage & Tobacco

Yes

The Milton Hershey School Trust controls all super-voting Class B Stock and 80.9 percent of the firm's voting power.

THE MARCUS CORPORATION

S&P 600 Consumer Services Yes The Marcus family controls over 77 percent of the voting power.

The New York Times Company

S&P 400 Media Yes

Members of the Ochs-Sulzberger family control more than 90 percent of Class B Stock that is entitled to elect a majority of board members.

The Wendy's Company S&P 400 Consumer Services No

Chair/ex-CEO Nelson Peltz, Vice Chair Peter May, and ex-COO Edward Garden (Peltz's son-in-law) control more than 24 percent of the firm's voting power. Four out of 10 directors that have been affiliated with Peltz's Trian Partners and/or Triangle Industries serve on the firm's board.

TOOTSIE ROLL INDUSTRIES, INC.


Yes The Gordon family controls over 50 percent of the voting power.

TripAdvisor, Inc. S&P 500 Retailing Yes Liberty TripAdvisor Holdings controls 56.5 percent of the voting power.

TTM Technologies, Inc. S&P 600 Technology Hardware & Equipment

No Su Sih (BVI) Limited controls 32.8 percent of the company's common stock.

Twenty-First Century Fox, Inc.

S&P 500 Media Yes The Murdoch family controls 39.1 percent of the voting (Class B) stock.

Tyson Foods, Inc. S&P 500 Food Beverage & Tobacco

Yes The Tyson family controls 70.6 percent of the voting power.

Under Armour, Inc. S&P 500 Consumer Durables & Apparel

Yes Founder/CEO Kevin Plank controls 66.5 percent of the voting power.

UniFirst Corporation S&P 600 Commercial & Professional Services

Yes The Croatti family controls 39.8 percent of Class B super-voting stock and 76.5 percent of the firm's voting power.


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Capital Structure?

Ownership Note

Universal Health Services, Inc.

S&P 500 Health Care Equipment & Services

Yes

The Miller family controls a substantial majority of Class A and Class C Stock that is entitled to elect a majority of the board and that represents 86.7 percent of the voting power.

Urstadt Biddle Properties Inc.

S&P 600 Real Estate Yes Chair Charles Urstadt and CEO Willing Biddle control 66.3 percent of the voting power.

Veritiv Corporation S&P 600 Capital Goods No Seth Meisel controls 49 percent of the firm's common stock.

Viacom Inc. S&P 500 Media Yes

Founder/Executive Chair Sumner Redstone controls 79.8 percent of the voting stock though his ownership interest in National Amusements.

Vicor Corporation S&P 600 Capital Goods Yes Founder/CEO Patrizio Vinciarelli controls 83 percent of the voting power.

Vishay Intertechnology, Inc.

S&P 400 Technology Hardware & Equipment

Yes Ruta Zandman, wife of founder Felix Zandman, controls 42.4 percent of the voting power.

VOXX International Corporation

S&P 600 Retailing Yes

Chair/ex-CEO John Shalam controls 53 percent of the voting power and 94.8 percent of Class B super-voting stock that enables him to elect a majority of the board.

Wal-Mart Stores, Inc. S&P 500 Food & Staples Retailing

No

The firm's largest shareholder is Alice Walton who controls 50.4 percent of outstanding shares. Her stake includes the holdings of the estate of John Walton which comprises 43.9 percent of the firm's common stock.

Watsco, Inc. S&P 400 Capital Goods Yes

Chair/CEO Albert Nahmad controls 53.5 percent of the voting power and 86 percent of Class B super-voting stock that enables him to elect up to three-quarters of the board.

Watts Water Technologies, Inc.

S&P 600 Capital Goods Yes The Horne family controls 68.9 percent of the voting power.

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