There’s a growing call to break up the world’s largest tech companies, and it’s coming from a variety of prominent voices, including Sen. Elizabeth Warren, the Democratic presidential candidate, and Chris Hughes, a Facebook co-founder. Their central argument: big tech companies like Facebook and Google are supra-national entities that have become too large to be held accountable. The argument is solid—but for the wrong reasons. It’s not that the companies are too big. The real problem is a void of accountability from the founder-led management teams that run them. If you want the ability to really hold companies accountable, get rid of the corporate structure that allows for this: dual-class shares.
Here’s some background: dual-class shares divvy up company ownership into two classes of stock—one that gives its owners more control of the company, and one (or more) that offers less. That control is dictated by the voting power that goes along with stock ownership. In such companies, founders and some key employees get a class of shares with more votes. Often (as at Facebook) those shares carry 10 times the votes of a normal common share. This means management is insulated from any real scrutiny when a company goes public, and that it doesn’t even have to pay much attention to what the board of directors thinks. For example, Lyft’s two co-founders own just 5% of the outstanding shares, but control nearly 50% of the votes. So are some management teams “unaccountable”? Yes.
Dual-class, or super-voting, shares came to prominence in the 1980s as competition between the New York Stock Exchange and NASDAQ heated up for public company listings. They were also popular back in the day at family-founded media companies like the New York Times or the Washington Post as a way to protect against takeover attempts that were seen as potentially threatening to editorial integrity. Fast forward four decades and about two-thirds of tech companies now going public have some form of dual-class shares.
As outrageous as this system sounds, some defend it based on the belief that the stock market is shortsighted. Given the short-term outlook of investors, these people say, management teams can carry out the greater good as they see fit, despite any short-term stock market volatility.
Here’s a question: Would you buy a house in which you could never live, had no say in how it was maintained or when it was going to be sold, and just hoped the price was going to go up? Of course not.
Dual-class shares with super-voting rights for only founders or top managers amount to theft by omission.
An investment in a company should come along with some level of meaningful voting rights. As it stands, dual-class shares allow company management to raise additional capital without giving up any rights, never mind control.
What’s fascinating is that investors don’t seem to care—yet. Sure, there’s grumbling, but so long as share prices have moved up, no one has been complaining. But real issues are now on the table, such as lack of transparency into how our data is collected and used, and multiple failures of governance among some of the same giant tech companies that operate with undue management control. We need answers—and accountability.
Consider Uber and the saga of its former CEO, Travis Kalanick. Initially, Uber’s board couldn’t do anything about his problematic behavior, mainly because of a dual-class share structure. It was only after this structure was removed that the board could oust Kalanick. Meanwhile, Lyft just went public with a 20:1 super-voting share structure for its founders.
In evaluating today’s best and brightest tech companies, it’s ironic that the ones that position themselves as the nice guys are just as guilty. Look at Pinterest, where co-founders control about 13% of the voting power with 11% of the shares. That delta isn’t nearly as bad as at many companies, but those provisions will probably enable them to consolidate power over time.
Google (now Alphabet) founders Sergei Brin and Larry Page may have always liked to “Do No Evil.” But if investors think there is insufficient transparency about Alphabet’s earnings, well, there’s very little they can do about it.
Accountability could be introduced by the Securities and Exchange Commission, or by Congress. They can disallow dual-class share structures at public companies.
Breakups would be hard to implement and won’t even solve the problem. But thankfully there’s an efficient, sensible remedy. Let’s give it a try.