Should DUAL-CLASS STRUCTURES Be Eliminated? Dual-class shares make companies unaccountable to shareholders, markets and courts.

• Author: Elson, Charles
• Position: BIG IDEAS FOR CORPORATE GOVERNANCE

Over the last decade, company founders have been opting to shore up control by creating multi-class voting structures that undercut shareholder voting power. This stock ownership structure reduces shareholder influence, undermines corporate governance and shifts the burden of investment grievances to the courts.

A NEW DEAL FOR SHAREHOLDERS

Multi-class capitalizations--in which founders and other insiders retain a class of high-vote shares while selling low-vote shares to the public--are nothing new for controlled companies. This mechanism has long allowed founding individuals and families to leverage minority economic ownership--say 10% or 20%--into total voting control of large companies, such as Facebook and Google.

In the situation with Snap, where the company went public with zero-vote stock, the logic of leveraging control from a minority interest through the dual-class structure reached its illogical conclusion. With nonvoting shares, a founder can advise investors plainly, without any pretense, that she will take their money but not their advice. We've reached the zenith of the disenfranchisement of the investing public.

The one-share controller hypothetical is, indeed, extreme. It is not, however, far-fetched, given the strong tendency for controllers to reduce their equity interest over time.

HOW WE GOT HERE

Traditionally, such dual-class capital structures were the anachronistic refuge of either media conglomerates or old-style industrial titans. Companies used the structure when the requirements for journalistic integrity and independence from the market demanded a safe harbor--The New York Times Company, News Corp. and The Washington Post Company were the representative adopters. It was also used at companies built by a founder through such singular achievement that the market could be strong-armed into accepting little to no protection in exchange for the capital it was giving, in trust, to a "genius." The Ford Motor Company, Berkshire Hathaway and Estee Lauder Companies are well-known examples.

A 21st-century trend, begun by Google in its 2004 IPO, is driving the dual-class capital structure out of the uncommon and into the mainstream. Increasingly, founders are opting to bolster control through highly leveraged voting structures, compared with the standard and accepted one-share, one-vote structure that was a constant for fear of an investor revolt and a public relations maelstrom.

The growing number of dual-class companies...