Corporate Governance and Shareholder Notification Obligations in 2025: Evaluating Voting Rights as a Proxy for Control and Investment Risk

The 2025 proxy season has underscored a seismic shift in corporate governance, driven by regulatory recalibrations and evolving investor priorities. At the heart of this transformation lies the tension between voting rights structures—particularly dual-class share systems—and their implications for control dynamics and investment risk. As shareholders grapple with the fallout from regulatory reversals and legal challenges to diversity mandates, the question of how voting rights shape corporate accountability and financial performance has become critical.

Regulatory Reversals and Governance Uncertainty

The U.S. Securities and Exchange Commission (SEC) has reversed its 2022 amendments to Rule 14a-8, easing the exclusion of shareholder proposals from proxy statements. This shift, coupled with the Fifth Circuit’s invalidation of Nasdaq’s board diversity rules, has created a regulatory vacuum. The court’s ruling that the SEC lacked authority to enforce diversity disclosures has emboldened companies to resist ESG-related shareholder demands, while proxy advisory firms like ISS have suspended diversity-based voting guidelines [1]. These changes highlight a broader trend: the erosion of shareholder influence in favor of management entrenchment, particularly in firms with concentrated voting power.

Dual-Class Shares: A Double-Edged Sword

Dual-class share structures (DCSS), which grant disproportionate voting rights to insiders, have long been a lightning rod for debate. Critics argue that DCSS distort governance signals, as seen in a 2024 Morningstar Sustainalytics study. The study found that DCSS firms reported 92.9% approval for executive pay packages, but adjusted figures revealed minority shareholder support of only 85.6%—a 7.3% gap [2]. This discrepancy underscores how DCSS can obscure true shareholder sentiment, particularly on contentious issues like ESG resolutions.

Yet empirical data paints a nuanced picture. Over the past decade, DCSS firms in the Russell 3000 have outperformed single-class peers by an average of 8.19% annually, compared to 7.45% [3]. This edge is attributed to the ability of insiders to insulate management from short-term pressures, enabling long-term innovation and strategic reinvestment. For example, Berkshire Hathaway’s dual-class structure allowed Warren Buffett to ignore activist investor demands and reinvest retained earnings, driving sustained value creation [4]. Similarly, Alibaba’s DCSS has shielded it from hostile takeovers and facilitated aggressive R&D spending in high-tech sectors [5].

The Risk-Reward Paradox

While DCSS firms often outperform, they also exhibit higher risk profiles. Studies show that dual-class companies have greater earnings volatility and are more prone to material accounting weaknesses [6]. For instance, Lennar Corp’s DCSS skewed proxy voting outcomes by 14 percentage points in favor of executive pay packages, reflecting governance risks tied to concentrated control [7]. However, proponents counter that these risks are context-dependent. In high-tech industries, DCSS firms generate higher-quality patents, as measured by citation counts, suggesting that long-term focus can mitigate agency costs [8].

Investor Responses and Governance Reforms

Investors are increasingly aware of the duality of DCSS. The Investor Coalition for Equal Voting Rights (ICEV) has pushed for sunset clauses—requiring DCSS to convert to single-class within five to seven years post-IPO [9]. Meanwhile, institutional heavyweights like BlackRock have updated proxy voting guidelines to emphasize board diversity and financial value creation, signaling a shift toward governance practices that align with long-term shareholder interests [10].

The debate, however, remains unresolved. While DCSS can foster innovation and protect against short-termism, they also risk entrenching self-serving leadership. The absence of major governance scandals in DCSS firms (e.g., no Enrons or Lehmans) suggests that performance, not structure, is the ultimate arbiter of corporate success [11].

Conclusion

As 2025 unfolds, the interplay between voting rights and investment risk will continue to shape corporate governance. For investors, the challenge lies in balancing the strategic benefits of DCSS—such as long-term focus and innovation—with the risks of concentrated control. Regulatory clarity, enhanced transparency in proxy voting, and investor-driven reforms like sunset clauses will be pivotal in aligning governance structures with market demands. In an era of heightened scrutiny, the lesson is clear: governance must evolve to reflect both performance and accountability.

Source:
[1] Capital Markets & Governance Insights - July 2025 [https://www.ropesgray.com/en/insights/alerts/2025/07/capital-markets-governance-insights-july-2025]
[2] Shareholder Democracy and the Challenge of Dual Class [https://corpgov.law.harvard.edu/2025/02/11/shareholder-democracy-and-the-challenge-of-dual-class-share-structures/]
[3] Re-Thinking The Hostility Towards Dual-Class Share Structures [https://corpgov.law.harvard.edu/2024/10/16/re-thinking-the-hostility-towards-dual-class-share-structures-when-dual-class-shares-work-better/]
[4] In Defense Of Dual-Class Shares | Yale Insights [https://insights.som.yale.edu/insights/in-defense-of-dual-class-shares]
[5] The Advantages and Challenges of Dual-Class Share Structure [https://www.researchgate.net/publication/389996323_The_Advantages_and_Challenges_of_Dual-Class_Share_Structure_A_Case_Study_of_Alibaba_IPO]
[6] New Study Says Multiclass Voting Companies Underperform [https://weinberg.udel.edu/new-study-says-multiclass-voting-companies-underperform-riskier/]
[7] Shareholder Democracy and the Challenge of Dual Class [https://corpgov.law.harvard.edu/2025/02/11/shareholder-democracy-and-the-challenge-of-dual-class-share-structures/]
[8] The innovation effect of dual-class shares [https://www.sciencedirect.com/science/article/abs/pii/S0264999319306637]
[9] Voting on Voting Rights [https://corpgov.law.harvard.edu/2025/01/22/voting-on-voting-rights-how-the-worlds-largest-investors-sanction-companies-with-unequal-voting-rights/]
[10] ISS, Glass Lewis and BlackRock Issue 2025 Voting Guidelines [https://www.akingump.com/en/insights/alerts/iss-glass-lewis-and-blackrock-issue-2025-voting-guidelines]
[11] Re-Thinking The Hostility Towards Dual-Class Share Structures [https://corpgov.law.harvard.edu/2024/10/16/re-thinking-the-hostility-towards-dual-class-share-structures-when-dual-class-shares-work-better/]