Total Control: Corporate Governance, Firm Performance, and Possible Solutions for Reducing Downside Risk in Technology Companies with Dominant CEOs

• Author: Matthew L. Strand
• Position: J.D. Candidate, The University of Iowa College of Law, 2020; B.B.A., The University of Iowa Tippie College of Business
• Pages: 1899-1929

1899

Total Control: Corporate Governance,

Firm Performance, and Possible Solutions

for Reducing Downside Risk in

Technology Companies with

Dominant CEOs

Matthew L. Strand*

ABSTRACT: Creative destruction and the popularity of dual class stock

structures have led to a recent increase in chief executives who either control

a majority of voting power within the company or exercise de facto control

through their considerable influence. Public corpora tions with such powerful

CEOs perform differently from traditional companies in statistically

significant and often negative ways. Interestingly, studies show that

companies with powerful CEOs in turbulent industries, like the technology

sector, experience negative firm performance at higher rates than those in more

controlled environments. Additionally, these dominant tech CEOs present a

corporate governance challenge, one that has not been properly addressed by

lax independence requirements for directors, who are often hand-picked by the

dominant CEO and have little incentive to advocate aggressively for

shareholder value. Traditional governance safeguards championed by

activists and shareholder rights groups are also insufficient because of the

dominant CEO’s control over the nominating and voting processes. As a

result, activists, stock exchanges, regulators, and courts must get involved to

minimize the negative aspects of CEO dominance that cannot be properly

monitored by the board of directors.

I.INTRODUCTION ........................................................................... 1900

II.THE DOMINANT TECH CEO AND THE INDEPENDENT BOARD ..... 1903

A.WHAT IS A DOMINANT CEO UNDER DELAWARE LAW? ............. 1903

B.THE DUAL CLASS STOCK SYSTEM ........................................... 1907

1.History of Dual Class Stock Structures ...................... 1908

2.The Increased Use of Dual Class Shares

by Technology Companies ......................................... 1910

* J.D. Candidate, The University of Iowa College of Law, 2020; B.B.A., The University of

Iowa Tippie College of Business. 

1900 IOWA LAW REVIEW [Vol. 105:1899

C.THE INDEPENDENT BOARD AND ITS LIMITATIONS ................... 1911

1.The Rise of the Independent Director ...................... 1912

2.How is Independence Defined? ................................. 1914

3.The Remaining Potential Conflicts............................ 1916

III.EMPIRICAL EVIDENCE OF CORPORATE GOVERNANCE

DIFFERENCES WITH DOMINANT CEOS ........................................ 1918

A.STUDIES OF CEO POWER ........................................................ 1919

B.IMPACTS OF CEO POWER AND FIRM PERFORMANCE ................. 1921

C.TRADITIONAL GOVERNANCE STRATEGIES ARE INEFFECTIVE

IN THE DOMINANT CEO CONTEXT ......................................... 1922

1.Staggered Boards......................................................... 1922

2.Requiring a Supermajority of

Independent Directors ............................................... 1924

3.Summary ...................................................................... 1924

IV. POTENTIAL REFORMS IN THE DOMINANT CEO CONTEXT .......... 1924

A.BAN DUAL CLASS STOCK STRUCTURES .................................... 1924

B.DIRECTOR TERM LIMITS ........................................................ 1925

C.INCREASE REQUIRED INDEPENDENCE IN DOMINANT

CEO CORPORATIONS ............................................................. 1926

D.GIVE NON-CEO SHAREHOLDERS BOARD SEATS ....................... 1927

V.CONCLUSION .............................................................................. 1929

I. INTRODUCTION

On August 19, 2004, Google (now Alphabet, Inc.) held its initial public

offering (“IPO”).1 The IPO began at a share price of $85 and raised over $1.9

billion for the company.2 Since its IPO, Google has grown into a worldwide

juggernaut, with a peak market cap of over $900 billion.3 In addition to its

great monetary success, Google has left another lasting legacy on the

technology sector that is less mainstream, but still vitally important. In its IPO,

Google used dual class shares to ensure that its founders, Larry Page and

Sergey Brin, retained control over the newly public corporation.4 Through

this structure, Page and Brin retained over 50 percent of Google’s voting

1. If You Had Invested Right After Google’s IPO, INVESTOPEDIA, https://www.investopedia.com/

articles/active-trading/081315/if-you-would-have-invested-right-after-googles-ipo.asp [https://

perma.cc/U49M-TQRU] (last updated Aug. 13, 2015).

2. Id.

3. Alphabet Market Cap 2006–2019 | GOOGL, MACROTRENDS, https://www.macrotrends.net/

stocks/charts/GOOGL/alphabet/market-cap [https://perma.cc/NXE9-Y7E6].

4. John Markoff, The Google I.P.O.: The Overview; Google’s Sale of Its Shares Will Defy Wall St.

Tradition, N.Y. TIMES (Apr. 30, 2004), https://www.nytimes.com/2004/04/30/business/google-

ipo-overview-google-s-sale-its-shares-will-defy-wall-st-tradition.html [https://perma.cc/8YQM-LY5S].