- At a growing number of companies, particularly in the tech sector, CEOs and other insiders have outsized control over their corporate decisions.
- The executives have that control through special shares that give them extra votes. Such arrangements used to be rare, but are becoming much more common.
- Lyft and several other tech companies that are likely to hold their initial public offerings this year will likely debut with such dual-class stock structures.
- Companies say such arrangements allow their executives to focus on their long-term success.
- But because they insulate insiders from legitimate concerns, they can be detrimental to investors and society as a whole.
If anyone thought the problem of unaccountable tech CEOs was going to go away anytime soon, think again.
In reality, it’s likely to get much worse before it gets any better, especially with a new wave of tech companies preparing to hit the public markets.
Last week, the Wall Street Journal reported that the founders of one of those companies — Lyft — are working on a plan that would give them near-majority control of the app-based car ride firm after its initial public offering.
The plan is a familiar one among those who have been raising concerns about unassailable tech executives — Lyft would create a new class of shares that would give John Zimmer, its president, and Logan Green, its CEO, extra votes. Those extra votes would give them far more power than their actual stake in the company, which stands at less than 10% of total shares combined, according to The Journal.
Zimmer and Green are likely to be among a sizeable group of tech executives at newly public companies that have disproportionate control over their firms. When they debut on the markets, Slack and Pinterest — among other companies — are both likely to include share structures that give extra votes to select insiders, The Journal reported.
Dual-class structures are becoming more common
Dual-class share structures have a long history, but until recently, they were rare. Investors, markets, and regulators all typically frowned on them. Google and Facebook both hit the markets with supervoting shares for their voters, but they were the rare exceptions to the general rule.
In 2004, when Google went public, for instance, it was one of just three tech companies and 13 firms overall that went public with a dual-class structure, according to data collected by Jay Ritter, a finance professor at the University of Florida. That year, 174 total companies had an IPO.
In the last several years, though, dual-class share structures have become much more common, particularly among tech companies new to the public markets. In three of the last four years, more than a third of the tech firms that had an IPO had multiple classes of stock, according to Ritter’s data. In each of the last two years, 13 tech firms debuted with such structures. Among those companies were Snap, Roku, Dropbox, and Spotify.
The dual-class structures give those holding the superpowered shares outsized say in corporate decisions. Frequently, the shares give insiders the ability to determine the outcome of any shareholder vote by themselves alone, or to choose by themselves the composition of their company’s board.
Companies that have created such structures for their founders or executives generally argue that they allow those leaders to focus on their firms’ long-term health and growth. But the structures also insulate leaders from shareholders’ legitimate concerns and often allow them to run their companies with little check on their power.
Early investors are signing off on the arrangements
In theory, investors could veto such arrangements at the time of companies’ initial public offerings. The institutional investors who buy shares in public offerings could push back against companies’ plans to create dual-class stock structures or refuse to take part in any offerings that involve them.
But that hasn’t been happening. Investors generally have been desperate to buy shares in fast-growing tech firms, investment bankers who work on tech IPOs have said. They’ve been more than willing to overlook dual-class structures if it means getting in early on growing company that can boost their returns.
The problem is that many of the companies that have launched with dual-class structures have done so without putting an end date on them. Their insiders will continue to have extra votes for as long as they want them. The vast base of shareholders can’t overturn the structure, because they don’t have the votes to do so.
That’s created a kind of agency problem. The initial investors who sign off on the dual-class structures are agreeing to those terms on behalf of all those who will own shares of the company in the future. While some initial shareholders end up being long-term owners, many don’t. Instead, in many cases, they use the IPO as a way to make a quick buck off a first-day trading pop. And while those initial shareholders may be comfortable with giving insiders extra votes, future investors may not be so happy with such an arrangement — but won’t have any power to change it.
The early returns of Google and Facebook seemed to indicate that some companies can benefit from insulating their leaders from shareholder pressures, at least initially. But lately, there’s been mounting evidence that such structures can be detrimental to investors and everyone else.
Over the longer term, investors lose out…
Last year, Robert Jackson, a member of the Securities and Exchange Commission, had his staff look at the stock market performance of companies with dual-class structures, comparing that had sunset provisions on their supervoting shares with those that would allow them to last in perpetuity. Within two years of an IPO, those with sunset provisions significantly outperformed those without them, according to Jackson’s research.
Snap is a case in point about the danger to investors. For much of the time since its March 2017 IPO, it’s traded below its $17 debut price, and it’s consistently traded below $10 a share since September. The company has been struggling since late 2017 when it launched a disastrous redesign of its Snapchat app that CEO Evan Spiegel insisted on — and that ended up alienating users.
At a typical company, investors or Snap’s board might have held Spiegel accountable for the company’s poor performance. But that was impossible at Snap. The company has a structure that gives regular investors zero votes per share. Investor input is so meaningless to the company that Snap didn’t even bother to hold an in-person shareholder meeting last year, instead holding a conference call that lasted all of three minutes.
…but so does everyone else
But it’s not just investors that can lose out because of all-powerful CEOs. The rest of us can too, as Facebook has made clear.
By just about any measure, the company’s last several years have been horrible. Its service has been hijacked repeatedly to spread propaganda and misinformation, some of which had led to deaths. It’s been plagued by repeated scandals, many of them due to mismanagement. Last year, its stock fell 26%, and its growth slowed markedly. And it faced a growing threat that regulators would come down hard on it.
There’s a good chance that any other company that had gone through what Facebook has experienced recently would have responded by firing its CEO and other top executives, if only to placate shareholders and regulators.
But not Facebook.
CEO Mark Zuckerberg decided he and Chief Operating Officer Sheryl Sandberg were the best ones to keep running the company. And because Zuckerberg has shares with supervoting powers that give him majority control of the company, his decision stood — no matter the cost to shareholders, users, or society in general.
Some investor groups and advocates have raising a fuss about dual-class shares, most notably the Council of Institutional Investors. But so far, their efforts haven’t done anything to stop the growing trend.
It’s not looking like much will. Corporate founders are unlikely to turn down the prospect of having perpetual power over their companies. Initial investors aren’t balking at giving them that power. And everyday shareholders have no ability to revoke such arrangements once they’re in place.
So the era of the all-powerful tech CEO is likely just dawning. God help us all.