Big tech companies like Google and Facebook have made their fortunes by putting the power of the Internet in the hands of ordinary people. But when it comes to empowering their own shareholders, these companies are a lot less willing to relinquish control.
When these firms went public in 2004 and 2012 respectively, they each issued two different classes of stocks: One class to be held by the founders and another by ordinary shareholders. In both cases, the voting rights of these share classes enabled the founders to retain complete control of the company. And on Monday, Google reached a settlement in a class action lawsuit that will allow it to issue a third class of shares with no voting rights at all, which will presumably give the firm ammunition for future acquisitions.
The tendency for tech firms to use a so-called “dual-class” structure (a bit of a misnomer in Google’s case, as it will now offer three classes) has drawn the ire of many investors. When Facebook launched its dual-class structure last year the advisory firm Institutional Investor Services (ISS) inveighed against the social media giant in a letter to clients. The letter recalled examples of companies like Benihana in which the dual-class structure fomented contentious battles for control of the company after the founders left. Writes ISS:
“By establishing a dual-class structure at the onset of public trading, companies divide ownership interests into potentially opposing groups. These early fractures can widen into fault lines, eventually resulting in a costly, distracting, and potentially unpopular restructuring.”
ISS also worries that a dual-class structure leads to unaccountable management and poor performance over the long run. Indeed studies have shown that firms with a dual-class structure pay their executives more, and their stocks perform worse than companies with a single-class structure.
But when deciding whether a company’s share structure will be good for the firm in the long term, it’s really necessary to look at companies on a case-by-case basis. First of all, Google has structured it’s shares to avoid some of the issues that befell Benihana. The Class B shares that Google founders Sergey Brin and Larry Page own automatically convert to Class A shares if they are sold, to prevent anybody else besides the founders from gaining dictatorial control over the company. Of course, this still doesn’t protect prospective buyers of the class C shares, which will have no voting rights, though they will receive the same dividend payments Class A shares receive if Google ever decides to pay one.
In the end, however, Google has structured itself in such a way as to keep control in the hands of its founders, and to keep investors obsessed with a quick buck from messing with their vision. Regardless of the complications this strategy might create in the future, it’s tough to argue with the idea that Brin and Page know what’s best for their company. No other company in America has had as much success pursuing ventures outside its core business as Google. And this has been great for shareholders and consumers across the globe. Would nettlesome shareholders have brooked such capital intensive programs like the Android operating system, the self-driving car, or Google Fiber if they had more say? It’s unlikely.
So even though prospective buyers of the Class C shares should beware that the lack of voting rights may become a burden down the road if and when Brin and Page run out of great ideas or simply moved on, it would seem that letting those two run their company undisturbed — at least for the time being — seems like a great plan for Google’s shareholders and customers alike.