Corporate Governance with dual class share structure: Frustrated investors are pressing for a “one share, one vote” policy
Dual class share structures, which ensure that a small group of company insiders have majority voting control, are all the rage among Internet companies. Facebook does it, Google does it (actually Google has three classes of shares), and LinkedIn does it.
But one small but vocal shareholder says it’s time for the practice to end.
Boston-based Northstar Asset Management has filed shareholder proposals with Facebook and Google, asking the companies to overhaul their share structure so that every share of the company is good for one vote.
It’s a futile battle, as Northstar CEO Julie Goodridge is the first to admit.
“We can’t possibly get a majority, unless Mark Zuckerberg votes in favor of our resolution, and I don’t think he’s going to,” says Goodridge, of the proposal to revamp Facebook’s share structure.
The reason NorthStar can’t win is because shareholders need to vote on her proposal and Facebook has the majority of the voting power — which is the whole point of dual-class shares in the first place.
Under Facebook’s current system, ordinary investors own Class A common shares, which provide one vote per share. But special Class B shares are worth ten votes each. Thanks to those shares, Facebook CEO Mark Zuckerberg and a small group of other people have roughly 74% of the voting power, according to NorthStar.
So why bother?
“The point is that if you don’t bring it up and if you don’t talk about it, it’s not going to get talked about,” says Goodridge, whose portfolio management firm owns 50,000 shares of Facebook for clients and has $250 million under management.
Goodridge says the accountability to shareholders is important for a wide range of issues, including boardroom diversity and environmental practices. As companies such as Facebook and Google expand into new markets and get more clout, it’s more important than ever for shareholders to have a say.
“If this is a company that’s going to get into everything, in the same way that Google has gotten itself into everything and become sort of the mega-company of the world, it’s problematic when they’re not accountable to the people that made them so wealthy,” Goodridge said.
Of course, all of these companies were up front about the special share structures in the prospectus to their initial public offerings, so investors should have known what they were getting into. And with Facebook’s stock trading near an all time high, other shareholders may not see much need to alter Zuckerberg’s control of the company.
In its rebuttal to NorthStar’s proposal, Facebook said that the dual class structure insulates management and the board from short-term pressure, allowing them to focus on long-term success.
But Goodridge says support for corporate governance reform at Facebook is greater than it appears. According to the proxy, more than 1 billion shares voted for a similar proposal last year. According to Facebook’s last 10-K filing, it has about 2.2 billion Class A (common) shares outstanding.
“That’s a huge percentage of the vote of the remaining shareholders,” she said.