Why I Might Sell Google

This article is part of our Rising Star Portfolio series.

Google's (Nasdaq: GOOG  ) been a successful component to my socially responsible Rising Stars portfolio thus far, but today the Internet giant has lost some major esteem in my eyes. Its recent decision to split its stock and issue a third class of shares is extremely unfriendly to shareholders.

Forget demeaning shareholders as second-class citizens; being demoted to a voiceless, voteless third-class citizen is even more insulting.

Psychology and split personality
As my colleague Tim Beyers pointed out this week in his exploration of how "evil" Google has become at times, Google's management has always been pretty upfront about not welcoming outside influence on, or interference with, business decisions. However, there's a pretty ironic turnabout going on in this situation.

The New York Times reported that at one point, co-founder and CEO Larry Page said of stock splits: "It's stupid. If you own 10 shares at $40 or one share at $400, it's the same thing! You just need to know how to divide." Exactly.

Stock splits amount to nothing more than, say, metaphorically cutting a pie into pieces and possibly changing some investors' perception of a stock price at first glance. In reality, splits don't add or subtract a bit of value from one's actual financial stake.

Well, so much for railing about the psychology of tricky arithmetic when it comes to the power and ego of management. Google's recent move is all about control. And it's not like Google's founders Page and Sergey Brin didn't possess plenty of voting power before this move; Page, Brin, and chairman and former CEO Eric Schmidt have 66% of the votes at Google.

Previously, Google had two classes of shares, Class A and Class B. Class A shares possessed one vote per share, and Class B shares (owned by folks like Page and Brin) came with a whopping 10 votes per share.

Triple threat
From the perspective of corporate governance, dual-class stock structures are troubling enough. However, when you reach into the realm of triple-class stock structures, things have truly gone over the top. Zynga's (Nasdaq: ZNGA  ) triple-class structure was shocking. Shockingly offensive, even: Founder Mark Pincus got a class of stock all his own, and those shares pack 70 votes each.

Google's move may not be quite that outrageous, but it's still pretty offensive. The new Class C shares, resulting from a bizarre two-for-one stock split, will bear zero votes. You heard that right -- zilch.

Google brought the dual-class stock structure into the tech world to begin with; previously, this policy was known for its popularity with old-school media companies.

Recent social media IPOs LinkedIn (Nasdaq: LNKD  ) and Groupon (Nasdaq: GRPN  ) both have dual-class stock structures. Facebook also will, giving Mark Zuckerberg an awful lot of control over a company he already has a lot of control over.

Maybe Zynga's little stunt upped the ante for how much power founders and management can demand (and shareholders will accept). Maybe Google doesn't want to be outdone in governance-style techno-arrogance.

One way to vote: on principle
There's something hypocritical about companies that decide to go public but apparently don't see much point in answering to shareholders in any way. If corporate managements are on that much of a power trip, maybe they shouldn't have made the decision to go public in the first place.

When I bought shares of Google for this portfolio, I grudgingly accepted the dual-class structure, warning that this was a corporate governance red flag in my risk list. The triple-class structure pushes me from grudgingly accepting of this troubling structure to, quite frankly, becoming kind of angry and insulted.

I know one conventional response is that if one feels so strongly about it, one should sell the shares. Over the course of the last several decades, most investors put their hard-earned money into companies that made them money without giving a hoot about things like ethical business practices or respect for all stakeholders.

And given the fact that my portfolio hinges on principles, don't worry: Selling Google on principle is a definite possibility, although this is a stock I originally believed was a solid hold for years. Take away shareholders' votes and there definitely remains one way to vote -- with our feet.

Management hubris and power trips are long-term risks at any company, and Google just pushed past the boundary of what seems acceptable to me. What do you think? I'm searching for thoughts, so let me know in the comments box below -- I'm feeling lucky.  

Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Google and LinkedIn. Motley Fool newsletter services have recommended buying shares of Google and LinkedIn. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (9) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 17, 2012, at 3:18 PM, CommonScents wrote:

    I agree that the stock split and non-voting shares isn't a great thing, but in my opinion nothing has changed. The co-founders already had majority control, and weren't about to lose it soon regardless. As you explained, the stock split is meaningless. So......what's different?

  • Report this Comment On April 17, 2012, at 3:23 PM, AcapulcoKevin wrote:

    Well today Pinkus opened his mouth again and said they want to dump hundreds of millions more into unknown companies. Zynga is tanking even faster now. Every move he makes just makes Zynga more and more unpopular with investors.

    I would have lost a pile of money had I invested in this company. I am certain there are many people wishing they never heard of the company or bought stock just because they have played one of the games.

    I want to see Federal regulation and oversight happening with companies like Zynga. The potential to cheat players is too great and the profit they are earning is very suspicious to me.

    Fraudulent behavior on the part of online casinos has been documented. The most commonly reported behaviors are refusal to pay withdrawals or cheating software with rigged payouts.

    Some casino software has been mathematically proven to cheat, such as Elka System/Oyster Gaming and Casino Bar.Screen shots from the back office of an older brand of software indicated the odds could be adjusted by the operator.

    Zynga creates their own games and is obviously in full control of the odds of winning. Without oversight there is no one to stop them from cheating their clients. Simply targeting people who have made purchaces in the past would be sufficient to stuff Zynga's bank account.

    I thought of this when I saw their biggest insiders dumping stock several days ago. They knew it would have a negative impact on the stock price but still dumped as quickly as possible.

    WHY ISN'T ANYONE ADDRESSING THIS ISSUE?

  • Report this Comment On April 17, 2012, at 5:24 PM, Quaker08 wrote:

    I'm going to sell my class C shares and buy the equivalent amount of class A. I just doubled my voting power!

  • Report this Comment On April 17, 2012, at 5:53 PM, GregLoire wrote:

    This article seems like an overreaction; it implies that current shareholders will lose voting power when the share dividend happens, but this isn't the case at all.

  • Report this Comment On April 17, 2012, at 7:32 PM, mill3417 wrote:

    Personally, I don't worry about who is in charge of what, just as long as when I look at the financials and everything is in tact then I'm okay. But I do understand the hypocritical point that was proven above, why be public if you don't want to hear from the public. Reminds me of when Goldman Sachs was confronted about calling the clients muppets behind closed doors. Here, Google is pretty much saying it in your face. lol.

  • Report this Comment On April 17, 2012, at 8:31 PM, lovesaves wrote:

    The Google founders aren't concerned about my puny 10 votes. They are ensuring that hedge funds don't ever control Google business decisions. As a current shareholder I have to decide who poses the greater evil, the founders or hedge funds. I have more trust in the Google founders. That said, I hope that Dan Loeb shakes Yahoo up.

  • Report this Comment On April 17, 2012, at 11:02 PM, Clint35 wrote:

    Thanks for another good article, Alyce. When you can't trust management it's time to sell. I think this shows that you can't trust them.

  • Report this Comment On April 17, 2012, at 11:12 PM, Rouleur wrote:

    Well, I think the author has some valid points about GOOG, but I am not sure I would go as far as calling unethical. If she invests in only shareholder friendly companies, then maybe she should sell, but I invest to make money and GOOg is a great value. Frankly, before the split, they already had protection against dilution , these latest steps have just put it in the spotlight. Sell it if you don't like the companies prospects, sell it if like the author you take it as a personal insult, but if you think over 20% growth could continue in a company with a P?E in the mid-teens, then allow yourself to relax, breath, and look at the big picture-making some money.

  • Report this Comment On April 18, 2012, at 9:24 AM, XMFDRadovsky wrote:

    Excellent piece, Alyce!

    Dan

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