PREFERRED shares represent ownership in a stock corporation. At the same time, they are also liabilities. Due Diligencer arrived at these contrasting definitions based on issuances of this class of stock by companies listed on the Philippine Stock Exchange (PSE).
The definition is intended as a wakeup call to public investors, so they may voice their opposition to the issuance of voting preferred shares to majority stockholders. Public investors have been limited to owning non-voting preferred shares.
The distinction alone puts the public stockholders of listed companies at a big disadvantage.
So far, no one has stood up openly against the issuance of 150 million voting preferred shares, which the Indonesian-owned First Pacific Co. Ltd. used to control the board of Philippine Long Distance Telephone (PLDT) Co.
While these voting preferred shares were supposed to have been issued to the PLDT Beneficial Trust Fund, First Pacific uses them to control and nominate the members of the board.
Preferred shares fall under equity in financial filings of a company. The inclusion makes them part of stockholders’ ownership. However, they are also liabilities because their earnings are fixed per annum and are taken from retained earnings.
As liabilities, the earnings due the holders of preferred shares should be included among a company’s expenses.
Yet, they are not. Instead, their owners are given the right to share from a company’s retained earnings, which represent a company’s accumulated net profits.
The sharing is unfair to common shareholders who should enjoy the exclusive right to a company’s surplus, which banks use in their financial disclosures instead of retained earnings.
In the case of PLDT, the exercise of voting rights over the telecom giant’s 150 million voting preferred shares was puzzling. Unfortunately, no one among the public investors opposed their issuance. Even the five-person regulatory body of the Securities and Exchange Commission (SEC) did not question First Pacific’s dominance of the PLDT board for reasons known only to the commission.
SMC as role model
The previous column was titled “SMC is more public than others” because the company’s public stockholders were listed as holders of preferred shares. Unfortunately, most of the public still own non-voting preferred shares.
Why SMC, which is short for San Miguel Corp., issued only non-voting preferred shares to public investors would remain unanswered. To clear doubts, the SEC should act and assert its regulatory power over SMC and other listed companies and ask why this was so.
Even PSE officials are silent on the discriminatory practice not only of SMC but also of some other listed companies in denying the public investors ownership of voting preferred shares. Their continued silence could only suggest that the public investors are traders only of listed stocks.
Yes, SMC could have become the model for other listed companies, had it rewarded its loyal public stockholders by issuing them voting preferred shares.
Due Diligencer’s take
A reader of The Manila Times had suggested that it is only in the Philippines where holders of preferred shares are given the right to vote for members of the board.
This reader’s comment should have been an eye opener to the SEC and PSE, so they may recognize the role of public investors in buying and selling listed stocks.
For a change, why don’t the SEC, as a regulatory authority, and the PSE, as a listed company, require the allocation of voting preferred shares to public investors?
Public investors should have a bigger share of the profitability of listed companies that are piled up in retained earnings. If they are allowed to own voting preferred shares, so much better. Why limit them to non-voting preferred shares?
Finally, will the SEC define preferred shares for the information of the public? As the securities industry regulator, its definition will clear doubts over the issuance of preferred shares by listed companies.
Finally, if preferred shares are liabilities, why should their holders be entitled to fixed interest earnings that are sourced from retained earnings? Just asking.