Raider Repellent

Is it the cornerstone of corporate democracy or an anachronistic regulation? That is the hotly debated question that swirls around the New York Stock Exchange's 60-year-old "one share, one vote" rule, which prohibits companies from issuing separate classes of common stock with differing voting power. Last week in Washington the SEC held two days of rare public hearings on the stock exchange's controversial proposal to abandon the rule. At issue is nothing less than the way in which U.S. corporations will be structured and governed.

The dispute is the result of the fire storm of takeovers that has swept through corporate America in recent years. One defense against a hostile takeover bid is for a company to issue to insiders stock that has disproportionate voting power. One share might carry, say, ten votes. At the same time, outside investors own shares with little or no voting power. In this way, insiders can retain control of a company in the face of a takeover threat. The N.Y.S.E.'s one-share, one-vote rule explicitly prohibits such a maneuver, so most companies that use the practice trade their stock on the American Stock Exchange or the over-the-counter market, both of which permit it.

N.Y.S.E. Chairman John Phelan argued that the Big Board is being forced to jettison the rule to meet competition from rival exchanges. Since 1984, 27 companies listed on the N.Y.S.E., including Hershey Foods and Cincinnati Milacron, have introduced nonvoting stock, which violates one share, one vote. But the N.Y.S.E. has allowed them to remain on the exchange pending SEC approval of Phelan's proposal. If the commission blocks his plan, these companies would have to eliminate their nonvoting stock or be removed from the Big Board.

Proponents of Phelan's reform argue that companies have a right to structure their capital bases however they choose. Said former SEC Commissioner A.A. Sommer Jr.: "The commission should keep its hands off." But most witnesses who came before the SEC defended the one-share, one-vote regulation. Institutional shareholders said the proposed reform would deprive stockholders of their right to influence how their companies are run. Said T. Boone Pickens, a corporate raider and self-appointed advocate of small stockholders: "Managers will become less accountable."

The SEC is expected to rule on the proposal early next year. But even if the Big Board is allowed to break with tradition, the debate may continue. Ohio Senator Howard Metzenbaum told the SEC that if the one-share, one-vote rule dies, there will be strong support in Congress for legislation to bring it back to life.