Warren Buffett likes to say that buying stock is equivalent to buying a piece of a business. If you own a business, shouldn’t you expect to have some control over it?
Evan Spiegel doesn’t think so. The Snapchat CEO and co-founder who became a billionaire when Snap Inc. (ticker: SNAP) went public in early 2017 doesn’t seem to care at all what people who bought the Snap IPO think about running the business.
[See: 7 Stocks to Buy When a Recession Hits.]
Literally. When Snap unloaded 200 million shares of stock to the public, making Spiegel and co-founder Bobby Murphy billionaires and rewarding early investors with a massive payday, guess what the public investors got? Two hundred million shares of SNAP stock — and a sum total of 0 voting rights.
That IPO was the first ever to sell non-voting shares, but it’s far from the only prominent company to dramatically dilute shareholder voting rights. And that tendency is bad news for the average investor.
A troubling trend, rationalized. While the SNAP IPO introduced an egregious form of disrespect for public shareholders, a slightly more subtle way of disabusing outside shareholders of their voting rights has been going on for years: dual-class stock.
It’s important to note that dual-class share structures aren’t de facto obscene, immoral or indefensible. There are a few legitimate reasons companies have for consolidating voting among the insiders in order to genuinely do what’s best for all shareholders.
One is industry-specific. Media companies in particular can cite a need to remain independent, objective, reliable and trustworthy as a reason not to allow meaningful outside shareholders, who may have self-serving interests that damage the company’s reputation.
Media companies also worry Wall Street will be myopic, perhaps trying to maximize quarterly profits by flooding customers with ads, or stripping the budget for investigative reporting. The New York Times ( NYT), CBS ( CBS) News Corp. ( NWSA) and many others still maintain a dual-class structure.
“Everybody knows where they stand when they buy News Corp. shares,” Rupert Murdoch said in October 2007 of the dual-class stock system.
The second situation where multiple share classes are used to reduce the sway of public investors is with companies run by founders. The argument? Founders know best, and they know how to create the most value.
This can certainly ring true. Alphabet ( GOOG, GOOGL), Facebook ( FB) and Berkshire Hathaway ( BRK.A, BRK.B) all have dual-class shares.
The third (more sinister) rationale. “Defenders of differential voting rights claim that the structure allows them to focus more on long-term performance than be a slave to the short-termism of the market,” says Matt Orsagh, director, Capital Markets Policy at CFA Institute.
“This is a false argument. There is an easy way to retain control — just own 50 percent of the shares,” Orsagh says.
If you’re confident in your ability to run the company, there’s no need to even own 50 percent. Take Amazon.com ( AMZN) CEO Jeff Bezos, who owns about 17 percent of AMZN stock, and has been able to retain control for decades. At this point, it would likely be too expensive for any activist investor to buy enough stock to shake things up.
[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]
There’s also a strategy known as a “poison pill” that companies can take in the case of a hostile takeover. The board of directors, at the drop of a hat, can essentially make a potential takeover pointlessly expensive for the acquirer.
So what is the third rationale behind non-voting and dual-class shares?
“Companies are sending the message that they want to control a majority of the votes but not take a majority of the risk. They want the public’s capital, but they don’t want to give shareowners a voice,” Orsagh says.
Why have just your cake when you can have it and eat it, too? Greed and power are two timeless and effective motivators, and it’s not shocking that they exist in the stock market.
Why it’s wrong. The SNAP IPO is a blatant and bothersome sign that the trend to strip public markets from their traditionally inalienable equal voting rights continues. That is clearly a negative for retail investors and average Americans everywhere.
It also destroys Buffett’s idyllic philosophy of what owning stock is all about: owning a piece — and therefore a say — in a business.
“I firmly believe in the concept of ‘one share, one vote,’ and have misgivings about companies with unequal voting structures,” says Daniel S. Kern, chief investment officer for TFC Financial Management, a registered investment advisor in Boston.
Ultimately, dual-class shares give less of a voice to the little guy and allow the company to insulate itself from change — regardless of how much change is actually needed.
Imagine, for example, if Uber was a public company (the Uber IPO is coming soon enough). What if founder and former CEO Travis Kalanick and his cronies owned the majority of voting stock and just decided to keep on keepin’ on? It would not have been good for business or recruiting.
Ultimately, buying stock with zero or negligible voting rights is flipping a coin. Not only are you betting on the stock — you’re making another bet, that insiders are the best ones in the world for shareholders. Why flip a coin?
“Snap and Under Armour ( UA, UAA), currently seen as laggards in governance and business execution, have been punished by the market,” Kern says. Under Armour also has a dual-class share structure.
Underperforming the market is one thing. Going completely bust is another. As you’ll recall, that’s exactly what happened to Enron and WorldCom. What you may not know? Both of those companies, which were driven to bankruptcy by scandal in the top ranks, had dual-class share structures — giving disproportionate power to those same top ranks.
Different points of view. Ultimately, what’s lost when the concept of shareholder democracy and “one share, one vote” goes out the window is the benefit of an outside perspective.
The wager an average shareholder makes when buying stock with vastly diminished voting power is bold, and shareholders should know that they’re making it. One must also question whether over the long-term the success stories will be relatively few and far between.
Rupert Murdoch, when defending the dual-class structure of News Corp. in 2007, cited the stability that having a consistent vision offered.
[Read: The 10 Most Anticipated IPOs of 2017.]
He also dismissed a company called Facebook — which was emerging as a stiff competitor to News Corp’s MySpace — saying it wasn’t worth buying above $10 billion. Today that company is worth about $500 billion. Now that’s what you call opportunity cost.
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Shareholder Serfdom: Investors Are Losing Their Rights originally appeared on usnews.com
