Google Wants Your Money, But Not Your Advice

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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.”

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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.

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5 comments
Aeropage135
Aeropage135

"No other company in America has had as much success pursuing ventures outside its core business as Google."

Like...?  Assuming that for a business-oriented article we can take "success" to mean "profit," Google is still the company that owes its existence to the "innovation" of using less-annoying, rather than more-annoying, ads in conjunction with a search engine.  Economies of scale now ensure they win automatically in that market.

Clearly Google has done a lot of things, some innovative, some not, often capriciously dropping the systems and their users after a few years.  It isn't clear to me, though, that there are any at all that turn a profit outside of the connection to displaying ads.

If we are looking for "success" as in actually creating new distinct markets with their own source of profitability, I submit IBM has Google beat hands-down.  Probably the case if we force ourselves to focus merely on the last 10 years, but absolutely the case if we are referring to a full company history your "company" seems to refer to.

Historybuff
Historybuff

I used to be a google fan.   Becasue of the recent revelations about how google uses their customer's data, and how google CEO Eric Schmidt uses google data resources for political purposes, I decided to dump google.

For every google product or tool... there exists an equivalent..   Start with gmail and simply use a Bing search  for 'best free email'... Picasa has equivalents, docs has open source equivalants...

Google has become like our supersized Big government:   Inefficient, arrogant, and abusive of their customers.   I can fire google... 

 

AndyClark
AndyClark

Facebook is 'not my kind of place'.  The 'Timeline' concept can be good and profitable (imo).  Most people know that every time you call a company and many govvy bureaus....the call is Recorded.   Most people know if you use an ATM at a bank....it is Video recorded.  All police interaction is recorded.   All that should be automatically transmitted to a 'Timeline'.  In Facebook spirit, it would be mostly to prove to the girlfriend/wife that you actually went to the bank instead of wherever she Imaged.  Most of you are too young to remember the 'obscene phone calls' kids liked to make.  The problem ended immediately with caller ID.  

AndyClark
AndyClark

The article refers to Google Shareholders.  I do not pay Google anything but I use their various services each day.  I would like to pay them $8 per month in return for a certain amount of enhanced searches maybe via services such as Lexis-Nexus, etc.  On Youtube part of the $8 would go towards musicians and the paying crowd would get a certain number of high quality downloads.  Maybe most important: The $8 per month buys me 'confirmed identity' by Google.  First Amendment (imo) assumes the speaker or writer is IDENTIFIED, back then there was no way around it...so it is implied.