Loyalty Shares and the Protection of Minority Shareholders

My paper offers an in-depth exploration of loyalty shares—also referred to as tenure voting or time-phased voting shares—as a mechanism to address short-termism and agency conflicts within corporate governance. By deviating from the traditional ‘one share, one vote’ principle, loyalty shares aim to reward shareholder loyalty and foster long-term engagement. The analysis focuses on their adoption in Italy, particularly under the Capital Law, and examines their broader implications for European corporate governance.

The framework underpinning loyalty shares is predicated on incentivising long-term shareholder commitment while balancing the dual objectives of ownership stability and minority shareholder protection. My study delves into the regulatory landscape, empirical impacts on Italian listed companies, and the nuanced interplay between governance mechanisms and market dynamics.

Research Questions

My article critically analyses whether loyalty shares effectively mitigate short-termism without exacerbating agency conflicts, by examining the nuanced effects on several metrics within Italian listed companies. Key to the analysis is understanding how loyalty shares reshape the balance of power between controlling and minority shareholders and whether these mechanisms truly align shareholder incentives with long-term corporate goals or simply entrench existing power structures.

The core of the empirical analysis involves a longitudinal study of 412 Italian listed companies from 2013 to 2022. This timeframe allows for a pre- and post-adoption comparison, isolating the impact of loyalty share implementation.

As anticipated, the study examines the nuanced effects on ownership stability, dividend policies, and market liquidity. Ownership stability is measured using share turnover rates and Herfindahl-Hirschman Index (HHI), allowing the study to determine whether loyalty shares genuinely foster long-term investment strategies or merely serve to consolidate control. Dividend policies are analysed by examining payout ratios and dividend yields to ascertain if loyalty shares lead to expropriation of minority shareholders through dividend manipulation. Market liquidity is assessed using bid-ask spreads and trading volumes to determine the efficiency of the market. Furthermore, it assesses the effectiveness of current minority shareholder protections, particularly in the context of related-party transactions. The Italian regulatory approach is then evaluated in light of whether it adequately addresses the inherent risks associated with enhanced voting rights, or if it leads to heightened voting premiums to the detriment of minority shareholders.

Key Findings

The empirical analysis reveals that loyalty shares enhance ownership stability by reducing share turnover rates. For instance, firms adopting loyalty shares exhibited a significant decline in trading activity, indicating a more stable shareholder base. Contrary to concerns about managerial entrenchment, these companies maintained consistent dividend policies and demonstrated no adverse effects on market liquidity.

However, the findings also highlight risks associated with concentrated ownership structures. In family-controlled firms, loyalty shares often serve to consolidate control, raising concerns about minority shareholder marginalisation. For example, voting premiums on Italian exchanges have historically exceeded 60%, particularly in family-run businesses where control is prioritised over equitable governance.

The regulatory framework in Italy attempts to address these challenges through measures such as requiring shareholder approval for significant related-party transactions and retroactively recognising pre-listing shareholding periods for voting entitlements. While these provisions aim to balance incentives, they have sparked debate over fairness and potential misuse.

Strategic Policy Recommendations

My paper provides several strategic policy recommendations aimed at maximising the benefits of loyalty shares while mitigating their risks:

1. Policymakers should mandate independent oversight for related-party transactions to prevent majority shareholder expropriation. This could include requiring supermajority approval for significant governance changes that disproportionately affect minority shareholders.
2. Regulatory frameworks should limit the duration of enhanced voting rights to ensure flexibility without entrenching power dynamics within corporate structures.
3. Empirical research should be expanded across different jurisdictions to evaluate the long-term impacts of loyalty shares on market discipline, investor behaviour, and governance quality.

Policymakers are encouraged to consider these insights when designing or refining governance mechanisms aimed at promoting long-term investment and corporate sustainability. Loyalty shares offer a promising avenue for aligning shareholder incentives with strategic development goals, but require careful calibration to avoid unintended consequences such as entrenched control or reduced market accountability. Future research should focus on comparative analyses across jurisdictions to identify best practices and refine regulatory approaches accordingly.

Conclusion

My paper argues that loyalty shares represent a nuanced yet impactful tool for addressing short-termism and agency conflicts within corporate governance frameworks. While not without risks, they offer a viable mechanism for fostering ownership stability and encouraging sustainable value creation when implemented within a robust regulatory structure.

The study underscores the transformative potential of loyalty shares in reshaping European corporate governance by simultaneously combating short-term pressures and reinforcing majority shareholder control. By offering strategic policy recommendations aimed at enhancing minority protections and ensuring balanced implementation, this analysis contributes meaningfully to academic discourse and practical policymaking alike—highlighting the delicate interplay between stability, equity, and innovation in modern financial markets.

Maria Lucia Passador is an Assistant Professor of Corporate Law and Financial Markets Regulation at Bocconi University.