By David Nelson, CFA
Mark Zuckerberg wants your vote! After hiring democratic pollsters and a travel schedule that could take him to all 50 states, speculation mounts that Facebook’s founder and CEO is looking to join the ranks of Presidential hopefuls in 2020. That creates an interesting dilemma for the $70 Billion man. He’ll be asking for your vote while stealing the votes of Facebook shareholders when he issues Class C shares with no voting rights.
Washington has nothing on the arrogance that comes out of Silicon Valley. There’s a long history of founders and CEOs who believe we must be protected from ourselves and our right to vote is less important than a founder’s right to rule.
Power is a close cousin to success and forces us to think a little differently once we have it. Wall Street adores that power as long as it is accompanied by a soaring stock price and the company continues to succeed. We care little about their decisions or how much they make as long as we get to come along for the ride. Increasingly, the visionaries we idolize decide that corporate governance is better served through monarchy rather than the democratic process.
The weapon of choice, dual-class shares which reduce or eliminate shareholder voting rights work with the same precision as an assassin’s bullet. Harvard University recently published a paper highlighting dual-class stock isn’t all that new and was quite common in the 1920’s. However, the crash of 1929 and the Great Depression that followed shocked the nation. Looking to eliminate the abuse, the NYSE demanded a 1 share 1 vote policy as a requirement to list on the exchange.
1980’s – Fast forward a half century and the young NASDAQ was starting to take market share offering companies the opportunity to create dual-class shares locking in control for founders and insiders. Eventually in 1984 the NYSE capitulated suspending the rule.
Google founders Larry Page & Sergey Brin
There are countless examples like Facebook but I often point to Google’s (GOOG) 2012 decision to split their stock with a 50% stock dividend offering no votes. As founders Larry Page and Sergey Brin sold stock to fund their lifestyles and employee stock options diluted shares, fears mounted they could lose control despite the fact they had super voting Class B shares. The decision was an easy one. Lock in control with a massive reduction in votes available to the common shareholder.
Snapchat founder Evan Spiegel
Why wait till you’ve have credibility and made money for investors when you can establish your dominance for a lifetime right out of the gate? That’s just what Snapchat (SNAP) CEO and founder Evan Spiegel must have been thinking when he launched the IPO of his popular social media app earlier this year. Offering zero votes, investors who swallowed that meal are looking at steep losses as the company struggles with competition and a business model that wasn’t ready for prime time. It’s one thing to buy a Facebook (FB) that’s already a proven goldmine and another like SNAP where the endgame is hardly certain.
Reacting to the seemingly brazen actions of management teams at Snapchat (SNAP) and Blue Apron (APRN), FTSE Russell announced that neither firm would be put in their index as a result of the decision to offer little or no voting rights.
What if we take the concept a step further? Suppose S&P and other index providers only let voting shares count toward the market cap when calculating the index weight. Large cap stocks with dual class shares like Google would suddenly be assigned weightings at a fraction of what they are today.
Overnight index funds and those trying to mimic the index would be forced to sell bringing their positions in line with index guidelines. That’s a pretty big message to the Silicon Valley elite who seem to have forgotten they live in a country that went to war, proclaiming their independence with many screaming “no taxation without representation.”
It doesn’t always end well
For failures in the dual class structure look no further than media giant Viacom (VIA) and its founder Sumner Redstone. Riding on the wave of dual class mania, in 1990 Mr. Redstone decided he wanted to control the company with only a fraction of the capital.
Sumner Redstone 92nd Birthday Party
Look, his success is hard to argue but over time the world changed and management failed to make the decisions necessary to compete. Mr. Redstone had long ago ceded day to day control but by 2016 at the age of 93 not only his health but his competency was in question. Lawsuits and scandals ensued but it had become clear he wasn’t the Redstone of old. Short of death or a declaration of incompetency, shareholders had little recourse but lawsuits. Of course today, the company is challenged with Thursday’s earnings release confirming company missteps seemingly incapable of dealing with the secular challenges of the broadcast industry.
I’m sure even if denied super voting rights or dual class shares visionaries like Page, Brin and Zuckerberg would continue their great work enriching our pockets as well as our lives with new services and products.
The point is, visionaries aren’t infallible and either are the assets or companies they control. Shareholders are entitled to and should demand one share one vote. Anything less is tyranny. Must we wait for another financial accident before shareholders are treated once again as owners with the same rights we enjoy as citizens, the right to vote?
*At the time of this article some funds managed by David Nelson were long VIAB
