The delicate balance between founder control and shareholder democracy continues to shape corporate governance. The S&P 500 is now accepting the change and has decided to list companies with dual-class share structures. This article explores the growing trend of dual-class share structures and its implications for founder control and shareholder influence.
With the growing trend of adapting dual-class structures, the question arises: why do companies issue dual-class shares? A dual-class share structure is when a company issues different classes of shares; these shares have varying voting rights and dividend payments. It has become controversial because it grants certain shareholders, such as founders, executives, or family, shares with superior voting rights (Class A shares), while the general public holds shares with voting rights. voting rights (class B shares).
Enterprise adoption of dual-class structures has recently seen a significant increase, with Alphabet Inc.’s Google serving as a prominent example. During Google’s IPO, the decision to issue Class B shares to founders, giving them 10 times more voting power than ordinary Class A shares, sparked frustration among many investors. However, despite the controversy, Google has maintained its dual-class structure. Meta (formerly Facebook), Zynga, Groupon, and Alibaba also have a dual-class structure.
The S&P 500 is now accepting change
THE S&P Dow Jones indices have made changes to their rules, allowing companies with multiple share classes to be included in the S&P 500. This marks a reversal of the S&P’s previous position in 2017, where it did not allow such companies, but preserved existing members of the index having multiple classes of shares. Among the companies that could now be included in the S&P 500 as a result of this rule change are Blackstone, Dell Technologies, Airbnb, Snowflake, Snap, Workday and KKR.
Blackstone, the largest alternative asset manager, saw its share price rise 4.9%, while Dell and that Airbnb have also experienced gains. Previously, the S&P believed that dual-class structures failed to adhere to good corporate governance and limited the pool of potential candidates for inclusion in its indexes. However, the view on Wall Street was that the exclusion of companies with dual-class structures was restrictive and overlooked notable companies, especially in the technology sector.
Loyalty shares
Loyalty shares are common in the French market, with more than twice as many companies adopting this structure as those without it. Loyalty shares are a type of dual-class structure where shareholders are granted additional voting rights based on the length of time they hold shares, typically two years. By default, these loyalty voting rights are generally granted unless contested by a two-thirds majority of shareholders. The idea is that any shareholder can benefit from higher voting rights by holding the shares longer.
The Two Sides of Dual-Class Actions
Dual-class share structures offer certain advantages, such as the ability to take a long-term view for companies and potentially help their performance during difficult times. They also offer stability and support through dedicated investors who cannot easily trade their stocks. However, there are valid criticisms of dual-class actions.
They can be seen as inequitable, creating a class of shareholders with fewer rights and concentrating power on a few individuals who can escape responsibility. Managers holding super-class stocks can face fewer constraints, which can lead to mismanagement and the transfer of financial risk to others. In some cases, dual-class structures have facilitated abuse and questionable decisions with little repercussion for those in positions of power.
Conclusion
The adoption of dual-class share structures reflects the continuing struggle to find a balance between founder control and shareholder democracy in corporate governance. While these structures can provide benefits such as long-term vision and stability, they also raise concerns about fairness, accountability, and potential abuse of power. The trend of dual-class structures in the United States, as seen in companies like Facebook, demonstrates the appeal for founders to maintain control while allowing public investment. The debate surrounding dual-class shares highlights the need to carefully consider the trade-offs between founder control and shareholder influence to ensure a fair and responsible corporate landscape.
