The increasingly widespread use of multiple classes of stock among tech companies has drawn criticism from a top official at the U.S. Securities and Exchange Commission.
In a speech on Thursday, senior Democratic regulator Robert Jackson Jr. said that companies should be forced to eliminate special classes of stock that give founders greater voting power after a limited number of years because they breed “corporate royalty.” The SEC commissioner argued that while giving control to the firm’s visionary founders makes sense during the early stages of development, It is not fair that ordinary shareholders should be forced to trust management’s judgment over an unlimited time period.
Companies such as Alphabet Inc. (GOOGL), Facebook Inc. (FB), Ford Motor Co. (F), Snap Inc. (SNAP) and Viacom Inc. (VIAB) currently have several different share classes, some of which don’t expire until the founder or longtime controlling shareholder dies.
“There’s a long-running debate on dual-class. On one hand, you have visionary founders who want to retain control while gaining access to our public markets. On the other, you have a structure that undermines accountability: management can outvote ordinary investors on virtually anything,” Jackson Jr. said. “It raises the prospect that control over our public companies, and ultimately of Main Street’s retirement savings, will be forever held by a small, elite group of corporate insiders — who will pass that power down to their heirs.”
When going public, many companies often choose to issue special share classes in order to give founders power to pick board members and decide whether the business can be sold. According to SEC Commissioner Jackson Jr., more than 14 percent of the 133 companies that listed on U.S. exchanges in 2015 have dual-class voting, up from 12 percent in 2014 and just 1 percent in 2005. (See also: Why would a company have multiple share classes, and what are super voting shares?)
Meanwhile, data from the Council of Institutional Investors, reported on by Bloomberg, shows that nearly one-fifth of companies that went public last year have dual-share classes with unequal voting rights. Of those companies, 74 percent reportedly issued share classes that will remain separate indefinitely.
Jackson Jr. argued against this trend, stating that special share classes should eventually expire to give regular investors more of a say in how the business is run. History, he added, proves that the use of dual-share classes isn’t beneficial over the long-term.
“One recent study shows that the costs and benefits of dual-class structures evolve over a company’s lifetime,” he said. “Shortly after the IPO, dual-class firms trade at a premium — but, as the company matures, this premium eventually disappears. Early in a company’s life, then, giving control to the firm’s visionary founders makes sense — but at some point that structure is no longer beneficial.” (See also: How Zuckerberg Will Control Facebook Forever.)