This is a difficult time for democracy, and autocratic leaders are on the rise. I refer, of course, to shareholder democracy and to the increasingly bold attempts of Silicon Valley entrepreneurs, when they go public, to prevent investors from having a say in the running of their company.
The founders of Snap, the owner of the messaging service Snapchat are brazenly selling second-class shares that give investors no votes at all over the company’s governance — a first for an initial public offering in the US — and while some pension funds wrote a stiff letter of complaint, it is not obvious that this will have much of an effect on the success or otherwise of the IPO.
Should it? What, after all, is the value of a vote? It is only when things have come off the rails that the ability to elect new directors and put pressure on executives becomes invaluable. Voting rights are insurance, and pricing the risk of management frailty or fraud is not like predicting hurricanes or floods.
Looking at data over the past 10 years, the governance group IRRC Institute found that total shareholder return at companies with dual class structures lagged behind those with one share, one vote. Other research suggests that, when founders have more voting power than economic skin in the game, they are more likely to load a company up with debt. More work needs to be done to firm up these conclusions. (There is little in the research, either, to support claims in Silicon Valley that dual class structures encourage long-term investment and outperformance).
The stock market is not much help. Price signals from companies that have dual class share structures are decidedly mixed. Alphabet, Google’s parent company, has two publicly traded classes of shares — A shares that have a one vote each and C shares that have no votes. Over the past year, the A shares have traded at a premium of between 2 per cent and 4 per cent, which suggests the market does value the voting rights, until you remember that there is a whole other class of B shares that have 10 votes apiece and which are privately held by the founders, who will always be able to outvote the A shareholders.
An alternative explanation for the valuation differential may be that Alphabet plans to issue only C shares in the future, making A shares the scarcer commodity.
And at Twenty-first Century Fox, since last October the non-voting A shares have been trading at a premium to the B class of voting shares through which the Murdoch family controls the company. This counterintuitive situation also prevailed two years ago; then it was blamed on selling by long-time B shareholders in Australia following the company’s delisting from the Australian Stock Exchange.
Supply and demand is the key to understanding how dual class shares trade, and it is only the language of supply and demand that can persuade the founders of Snap — and the next generation of unicorn jockeys planning to ride on the public markets — to adhere to one share, one vote norms.
The trouble is that, in an era in which more investors are simply tracking the market, large companies know that there are lots of forced buyers for their stock. Google’s non-voting shares are in the S&P 500 right alongside its voting shares; Berkshire’s super-voting stock carries no more weight in the index than its lesser-enfranchised B shares.
More than a decade ago, the major indices were switched from a pure market cap weighting for constituent companies to one that reflects only the “free float” of shares available. Can the index providers be persuaded similarly to adjust weightings to reflect the voting power of public shareholders? That would underweight or eliminate entirely from an index the companies that are controlled by autocratic founders.
It is a suggestion I put to David Blitzer, chairman of the index committee at S&P Dow Jones. The answer I got is that the Snap controversy has already got him thinking about a “good governance” index that might exclude companies with a dual class share structure or other shareholder-unfriendly characteristics, such as poison pill takeover defences and staggered board elections.
Up to now, he has not sensed any strong demand for such an index. Perhaps investors will be so alarmed by the precedent-setting Snap IPO that this will change. We will see.