In what many seem to see as a legal and financial footnote, Google issued a new class of shares on Thursday that will trade under a separate ticker symbol because they carry no right to vote, unlike the regular class of Google stock. Why would the company do this? Because it wants to be able to issue new shares either as compensation or to use in acquisitions, without changing the existing ownership structure of the company — one which gives Larry Page and Sergey Brin control of the votes through the multiple-voting shares they hold.
In fact, for all intents and purposes, the existing single-vote shares in Google might as well have no voting rights, because Page and Brin control enough of the multiple-voting variety (84 percent) to make them useless. In a similar way, Mark Zuckerberg exercises unilateral control over Facebook by virtue of his holdings in multiple-voting shares — voting control that will even extend beyond the grave — and he also controls a majority of the board of directors by way of voting proxies.
Here’s how it works in practice: shareholders didn’t like Google’s plan to issue the new class of non-voting stock, so they marshalled 180 million votes at the last general meeting, a larger number than almost any other measure that reached the floor. The proposal died, however, after 551 million votes against — 467 million of which came from Larry and Sergey, despite the fact that they only own about 16 percent of the outstanding shares of the company.
.@mathewi I think multi-share class structures are not entirely evil, but you can see full evil from there.—
Paul Kedrosky (@pkedrosky) April 03, 2014
Shareholder rights vs. founder vision
This is not a new thing, of course. Google laid out the details of its share structure in its offering prospectus in 2004, and was clear about why it wanted to organize the company in that way: because Page and Brin believed they were embarked on a multi-decade journey to create a new kind of company, and didn’t want to be bogged down by the short-term interests of investors. As they put it at the time:
“As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations.”
This is an appealing idea: the founders as stewards of a particular vision, who must be free from the constraints of the hoi polloi, etc. so that they can pursue things like self-driving cars and Google Glass, for the betterment of humanity of course. By this reasoning, shareholders and investors are just along for the ride — if they don’t like the vision, then they are free to sell their shares and look elsewhere, because that is the only choice they are given.
@mathewi Control! Wall Street's short-termism can destroy companies.—
Henry Blodget (@hblodget) April 03, 2014
Cementing power in the hands of the few
Despite this grand-vision theory, however, multiple-voting share structures have historically been used to centralize control in the hands of a few, in order to make it harder for investors to mount a revolt — and also in many cases as a way of funnelling a majority of the surplus income (via dividends and other mechanisms) into the hands of a controlling shareholder and/or his or her family. This has been the case with many large media companies, including the New York Times and the pre-Bezos Washington Post, as David Carr detailed in a recent story.
For media entities — which in some ways were the search engines and social networks of their day — part of the rationale for the multiple-voting structure was to protect the mission of the company: the pursuit of journalistic truth was (theoretically at least) so important that one couldn’t risk having it fall into the hands of rapacious bankers or foreign competitors.
Google clearly sees its mission in a similar way, and Mark Zuckerberg arguably feels the same about Facebook’s purpose: namely, giving the world a platform through which to share everything they think and do. And that’s great. But both are also profit-oriented companies, not charitable enterprises — they both make decisions that benefit primarily their most important customers (advertisers) rather than their users. What ability do users have to influence those decisions? Zero. As Nick Summers at Bloomberg Businessweek put it:
“Here’s a philosophical question Google investors can ponder this morning: If you own stock in the tech giant, would you rather have voting rights that are essentially worthless or ones that are literally worthless?”
A benevolent dictator is still a dictator
The number one defense given for multiple-voting shares is the same one provided by Google in its original letter to shareholders: that short-term goals can distort a company’s vision and cause it to fail. But the flawed vision of a founder can do this just as easily, when there is no easy route to correcting that vision. Look at how long it took Yahoo to find its way — how much longer would it have taken if Jerry Yang and David Filo had multiple-voting stock? And when a founder sets out to plunder a company the way former Lord Conrad Black did with Hollinger Inc., there is little recourse for shareholders.
It’s true that controlling the majority of board votes and shareholder votes allows Mark Zuckerberg to make audacious bets, like the one he made by dropping a mind-boggling $19 billion on the acquisition of WhatsApp or by buying Instagram for a less mind-boggling $1 billion — a deal he cut before he even notified the board of his interest in the company. And in Silicon Valley, where the cult of the visionary founder reigns supreme, this model no doubt seems totally appropriate, to the point where Zynga, LinkedIn and others have adopted it.
But the principle behind issuing shares to the public is that a bargain is struck, in which the company agrees to do certain things in return for that money, and shareholders have the right to hold them to that commitment through shareholder meetings, votes and so on. That bargain becomes completely one-sided when the owners maintain what amounts to unassailable voting control.
The bottom line is that multiple-voting shares work well for everyone when a company is doing well, and making good decisions. Shareholders of Google have probably been more than happy to go along for the ride with Larry and Sergey (although research shows that companies with multiple share structures tend to underperform). But this is a little like approving of dictatorship because your dictator happens to be a great guy. That doesn’t mean the model isn’t flawed — it just means those flaws haven’t become obvious yet.