THE LEX COLUMN: Dual class shares prove their mettle
Slack leads pack of companies at which executives wield the most voting power and still do extremely well
Office chat app Slack’s direct market listing has proved the staying power of dual-class stock. The share may have dipped since opening at $38.50 but it trades at a premium to the top price paid in private markets.
The S&P and Dow Jones indices can ban companies with dual-class shares from joining the benchmark indices. The Council of Institutional Investors can call them egregious. But public companies that concentrate voting power are now the norm in Silicon Valley. This is largely connected to the myth of a founder’s preternatural understanding of their business. Successful early adopters help.
Google introduced the idea in 2004. Its share price has risen from $85 to $1,115. Companies claim the set-up enables executives to focus on longer-term goals than fickle capital markets permit. But it can also rob shareholders of their voice. Sunset clauses that phase extra voting rights out over time are an obvious middle ground and are gaining traction. In 10 years, all outstanding Slack shares will convert to common stock without extraordinary votes.
The second option is to push for a limit on total voting rights. Slack’s top shareholders received 10 votes per share, compared to just one for new investors. As a result, founder Stewart Butterfield has 17.8% of voting rights. In total, however, executives have just over 52% of the voting power.
Facebook CEO Mark Zuckerberg also owns shares that carry 10 votes but has about 60% of the overall voting power.
Social media network Snap sold shares to the public with zero voting rights, leaving its co-founders Evan Spiegel and Bobby Murphy with 97% of votes.
Ride-hailing company Lyft gave its two co-founders, Logan Green and John Zimmer shares worth 20 votes apiece, yet together they control less than half of all voting rights.
Asking for boundaries in dual-class listings will do more than demanding their cancellation. Last year, dual-class initial public offerings outperformed the broader index. Until they underperform, executives will have no incentive to stop awarding themselves disproportionate voting rights.
© Financial Times