The chairmen of the New York and American stock exchanges agreed yesterday that companies traded on the major markets ought to comply with the "one share, one vote" principle, but the chief spokesman for the over-the-counter market demurred.
The leaders of the three exchanges testified before a House subcommittee that is studying a controversial proposal that would permit companies listed on the New York Stock Exchange to have two classes of common stock with unequal voting rights.
John J. Phelan Jr., chairman of the New York exchange, and Arthur Levitt Jr., chairman of the American Stock Exchange, said that instead of the NYSE lowering its listing standards, the Amex and the over-the-counter market ought to raise their standards to require listed companies to have one class of common stock. They said this would eliminate the competitive pressure on the NYSE to lower its listing standards and would preserve the nation's traditional "one share, one vote" system of corporate governance.
But Gordon S. Macklin, president of the National Association of Securities Dealers, refused to go along with Phelan and Levitt, saying that he was still studying the issue. "It is a complex issue deserving thorough analysis," Macklin said.
While current NYSE rules specify that all of the common stock of companies listed on the Big Board must have equal voting rights, the Amex and the over-the-counter market allow their listed companies to have different classes of common stock with disproportionate voting rights.
The creation of two classes of common stock -- with a new class controlling a majority of votes placed in friendly hands -- has become increasingly popular in an era when corporate management is trying to find ways to discourage hostile takeover attempts.
Switching to two classes of stock and putting a safe majority of votes in friendly hands enables a corporation to block an unwanted takeover. Several NYSE companies interested in discouraging hostile takeover bids, including Dow Jones & Co., publisher of The Wall Street Journal, and Hershey Foods Corp., have adopted a second class of common stock and may be forced to leave the NYSE unless the rules governing listing on the exchanges are changed.
" 'One share, one vote' has served the market well," Phelan said yesterday in testimony before Rep. Timothy Wirth's (D-Colo.) subcommittee on telecommunications, consumer protection and finance. "Philosophically, we still believe in it. And in the best of all possible worlds, most people would probably want us to retain it.
"But the world is changing very rapidly, and the issue transcends the New York Stock Exchange. The environmental and competitive changes that have brought the issue to prominence are national in scope. And the competitive environment may very well make it impossible for us, standing alone, to retain the 'one share, one vote' rule. . . . We need some help holding that standard up."
Phelan said NYSE-listed companies that violate Big Board rules by adopting two classes of common stock know they will be welcome on the other exchanges. He said that as long as the difference in listing standards exists, NYSE companies will consider lowering their standards and moving to one of the other exchanges.
Phelan said that if the Amex and OTC markets raised their listing standards, he would favor "grandfathering" the new rule to allow companies that already have two classes of common stock, such as The Washington Post Co. and The New York Times Co., to keep their voting arrangements.
Securities and Exchange Commission officials said last week they have received preliminary proxy materials from 21 companies that are considering changing to two classes of common stock. Phelan said yesterday he thinks more than 200 companies would try to switch to two classes of common stock if the NYSE lowers its listing standards.
Levitt said the Amex probably would lose listings to the NYSE if the Big Board allowed companies to have two classes of common stock.
"I do not want a race to the bottom," Levitt said. "I do not even want a race downhill. What is needed now is responsible cooperation among the self-regulatory organizations which comprise our securities markets. The New York Stock Exchange should not lower its standards. The NASD and the American Stock Exchange should together raise theirs. . . . I am here to tell you that I, and the American Stock Exchange, stand ready and willing to move ahead on that course at once."
NASD President Macklin said competition for listing among the exchanges does not mean there is a "race to the bottom" under way.
"There has in recent months been much comment, both in the press and in the governmental/regulatory community, about a feared 'race to the bottom' among the securities marketplaces," he said. "Admittedly, there is more competition between the country's securities markets, but we do not believe it to be inherently detrimental to the investing public. In fact, we believe there have been a number of public benefits that have resulted from this intermarket competition, in the areas of automation, information and market services to issuers."