Let’s talk about how it is that the intangible value of an individual shareholder’s right to participate are able to create an amount of value. While we ourselves might be somewhat apathetic towards the coming shareholders meeting and vote over whether or not to pursue a certain accounting measure, the way in which these rights create value for larger shareholders secures the value of our investment through the magic of the capital markets.
Recently, several companies have undergone amounts of scrutiny for their decision to dilute out the voting power of their common shares, in order to maintain a certain amount of management-level control over the company. Be it through stock splits, new issuance, buy-backs, or conversions, companies have several tools at their disposal to accomplish the goal of consolidating control over their holdings.
In doing so, they are able to take more decisive actions, and do not need to fear as much the threat of a take-over. That being said, it also takes away the ability of individual investors to have an impact in the company’s operations. Because of the way in which each individual common share comes with the right to vote on material issues faced by the company, the right to influence a company holds a great deal of value for a major investor.
Particularly the case for fund managers, the ability to influence a company’s decisions can be extremely valuable. For example, should a major fund manager be present during a meeting that will be discussing whether or not to institute a shareholder dividend, that manager has the ability to directly impact what kind of return their clients will receive from their holding. Alternatively, if there is an election to determine who will take over as the president of operations during a period of major transition, the fund manager might see it prudent to influence the decision about who will take over control to suit their clients’ needs.
For all of these reasons and more, major investors are able to create tangible returns on their investments simply by holding a voting capacity. Because of this ability to create returns, institutional purchasers will place a price on the value of the mere voting rights of a common share. This means that companies in the midst of turmoil will likely see the value of their common shares dramatically increase in comparison to that of the preferred shares, simply because of the inclusion of a right to vote.