Tenure-Based Voting Rights: A Solution to the Control-Growth Dilemma in Family Firms

When raising external equity is necessary for investment, family owners may hesitate, fearing loss of control. This hesitation can lead to underinvestment and limit the firms' growth potential. This control-growth dilemma is compounded by the principles of good corporate governance, which typically favor the one share–one vote system and oppose mechanisms that enhance control for specific shareholders. 

Control-enhancing mechanisms like multiple voting rights and tenure-based voting rights (TVRs) offer a controversial yet promising solution. TVRs grant additional voting rights to long-term shareholders, potentially allowing family firms to raise capital without relinquishing control.  

Our study examines the adoption and effects of TVRs in Italy, where they were introduced in 2014 to encourage investment and reduce short-termism. 

TVRs, in Italian law, are rights that any shareholder can obtain if they hold the shares for at least two years. Such rights are lost if the underlying shares are sold or transferred. Their adoption is not mandatory (as it is in France)   ̶  firms choose to adopt TVRs through a modification of corporate charter that must be approved at the Annual General Meeting with a qualified majority (i.e. two thirds). This allowed us to compare features and results of firms that adopted TVRs with those of firms that decided not to. 

In order to investigate the relationship between TVRs adoption and investments, we analyzed a sample comprising all nonfinancial firms listed in Italy over the period 2015–2019. The sample period begins in 2015 because TVRs legislation was introduced in 2014. Our final sample comprises 241 unique firms (964 firm years) for which complete data are available. 

We observed that family-controlled firms adopting TVRs maintained an above-average investment trajectory and increased investment when family control was fragile. Our results include: 

• Family-controlled firms maintained or even increased investment levels after adopting TVRs. This suggests that TVRs do not discourage investment but rather help family firms overcome the control-growth dilemma. 
• Family firms with fragile control positions – those most susceptible to losing control through equity issuance – showed the most significant increase in investment after adopting TVRs. This finding highlights TVRs' effectiveness in addressing the core concern of family owners. 
• Family firms issued more equity after adopting TVRs, with an average increase equal to 3.7%. This demonstrates TVRs' ability to facilitate capital raising without jeopardizing control. 
• Following TVR adoption, family firms increased dividend payouts and minority shareholder representation on boards. This suggests a commitment by family owners to using TVRs for the benefit of all stakeholders, enhancing trust and attracting further investment. 
• The study found no negative impact on firm performance after adopting TVRs. This dispels concerns that TVRs might undermine good corporate governance or profitability. 

Overall, the study suggests that TVRs can be a valuable tool for family-owned firms to achieve sustainable growth. By enabling them to raise capital without sacrificing control, TVRs benefit both family owners and outside investors. These findings offer valuable insights for capital markets regulators and family businesses alike, demonstrating that TVRs can promote growth and good corporate governance practices. 

Claudia Imperatore and Peter F. Pope, “Do tenure‐based voting rights help mitigate the family firm control‐growth dilemma?”. Strategic Management Journal 2024. doi: https://doi.org/10.1002/smj.3630.