Should You Boycott These Big-Name Stocks?

Good corporate governance policies include shareholder-friendly stances. One heavyweight shareholder that agitates for corporate governance changes is taking on a high-profile target: dual-class stock structures.

Pension fund and activist investor California Public Employees' Retirement System, also known as CalPERS, has suggested it will campaign against and boycott stocks of companies where management and insiders control the majority of the shareholder votes.

Class warfare
Dual-class ownership structures aren't a new innovation. Media companies have instituted them for years; one rationalization is retaining editorial control. The New York Times (NYSE: NYT  ) and Washington Post are two good examples of media companies that have long utilized the practice.

Other corporate managements have caught on to how diabolically delightful it is to keep this degree of control over anything that's subject to a shareholder vote. When Google (Nasdaq: GOOG  ) went public in 2004, it used a dual-class structure to give Larry Page, Sergey Brin, and Eric Schmidt "control over Google's destiny," as the company's original shareholder letter put it.

Here's the bottom line: In such arrangements, the class of stock that management and insiders own possesses far more voting rights than the regular shares you or I would purchase; a typical ratio is 10:1. Non-insider investors will never win any vote that's presented to shareholders.

The practice undermines the idea that all shareholders are owners, since some special, anointed shareholders retain control. It basically turns shareholders like you and me into second-class citizens.

New media goes old school
The idea that solid corporate governance policies help avert corporate disasters, and even large-scale macroeconomic ones, is gaining traction. You'd think practices like dual-class stock structures would sound positively prehistoric in the increasingly wired and connected world that social media has helped create. However, that hasn't been the case at all in the recent batch of IPOs.

Facebook (Nasdaq: FB  ) went public with a dual-class stock structure, like many other recent social media companies. Facebook's Class A shares for regular investors have one vote per share; Class B shares have 10 votes per share.

Soccer team Manchester United (NYSE: MANU  ) is a heck of a weird idea for a publicly traded company, and it also has a dual-class structure in place. Like Facebook, its Class B shares possess 10 votes each versus Class A's single vote per share.

Zynga (Nasdaq: ZNGA  ) took the whole concept even further into outrageous territory, having three classes of shares when it went public. Class A shares have one vote per share, Class B shares have seven votes per share, and Class C shares have 70 votes per share. Not surprisingly, Zynga founder and CEO Mark Pincus holds all the super-powerful Class C shares.

Google recently decided to make its dual-class stock structure even more shareholder-unfriendly by issuing a third class of stock that it will push on existing investors through a stock split. This new class of stock possesses no voting rights. Needless to say, this is a way for Google's management to heighten its already tight control over the company. It's also grounds to consider selling the stock on principle.

Even if principle isn't enough, performance might suffer, too. In May, James Surowiecki wrote on the topic for The New Yorker and cited a study that tracked a significant number of companies with dual-class structures from 1994 to 2001. The researchers found those companies had underperformed the market.

In other words, all that coveted management control isn't necessarily good for anyone but managers' own egos -- and possibly pocketbooks.

Don't allow yourself to feel out-classed
The dual-class stock structure allows corporations to access public capital without acknowledging -- much less respecting -- the traditional ownership concept of buying and holding shares in a public company.

It also underlines exactly what's been going wrong with many American public companies over the years. Managements and boards have run roughshod over investors, trying to convince everyone that shareholders aren't an important or significant part of the equation.

Don't let the "shareholder value" rhetoric sway you, either. Corporate America has become adept at rationalizing poor behavior and poor performance while implying that unhappy shareholders should simply sell.

Multiple-class stock structures simply make perfectly clear managements' intentions and their desire to escape accountability to other shareholders. There's a perfectly good argument that these companies should have simply stayed private if they were unwilling to truly live up to the spirit of being publicly traded and owned.

CalPERS is a megapension fund with $237 billion in assets under management, so its impact on the companies and issues it tackles is significant. Its harsh stance on the increasingly frequent dual-class stock structure is perfect timing and should help increase the spotlight on the practice. Shareholders should take note of this dangerous duality and consider some boycotts of their own.

There's a lot more to Facebook than its dual-class structure and CEO and founder Mark Zuckerberg's control. Check out our premium report on Facebook, which examines the key opportunities and risks that face the newly public social media company. Click here to find out more.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services have recommended buying shares of Facebook and Google. 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 (7) | Recommend This Article (8)

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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 August 22, 2012, at 11:13 AM, st0815 wrote:

    Not sure why that should influence my investing decisions. Google is a 220 billion company - my votes will never matter to them, regardless how well things might go for me until I retire.

    So the choice for me is to buy stock in a company which gives 99.7% of the voting rights to bean counters who know nothing whatsoever about the business the company is in. OR: to buy stock in company which follows the direction of extremely knowledgeable people with a stunningly successful track record.

    What about CalPERS - do they have the vision and insight it takes to grow a technology company? Do I want them to run Google, or is it better for me if Larry Page does it? I rather suspect I don't benefit from their involvement.

    I can still vote in the only way which really makes a significant difference in regards to my money: by selling the stock and buying something else.

  • Report this Comment On August 22, 2012, at 11:31 AM, corpgov wrote:

    Great post by Alyce. This isn't an easy choice. Founder's do have vision. If they retain a reasonably high proportion of stock, those companies often do better -- at least for a while -- because they have the incentive to properly monitor. However, dual-class structures take this another step, setting up essential dictatorships. Yes, they get the trains to run on time (like good fascists) but they're not so good at being creative -- at getting full engagement. See my post on this subject at http://corpgov.net/2012/08/calpers-may-boycott-dual-class-ip...

  • Report this Comment On August 22, 2012, at 12:52 PM, pondee619 wrote:

    Is buying into, or holding onto, a stock with a "dual-class stock structure(s)" knowing about the class structure, any different than voting with the Board recommendations or, worse yet, not voting your shares at all? Shouldn't the sole consideration in buying, or holding, a stock be whether that issue will generate income or gains to you? Is my position on any votable issue that much better than the insiders or founders?

    "(U)nhappy shareholders should simply sell." Or, maybe, You Should Boycott These Big-Name Stocks?

    "these companies should have simply stayed private". Perhaps. but by going public in the way they did, I, as a private small investor, have an oportunity to share in the profits of these otherwise "private" businesses.

    " a study that tracked a significant number of companies with dual-class structures from 1994 to 2001. The researchers found those companies had underperformed the market." However, this citation does not, and probably because the study did not, cite the cause of said underperformance. Was underperformance CAUSED by the dual-calss structure or just because they were underperforming companies for some other reason. Would they have out performed if they had a single class structure?

    So many irrelevant things get discussed on these pages. The only issue to consider is whether you will make money owning a part of the company. Stock class structure, social responsibility, et. al. only make a difference if they adversely effect your ability to gain by owning a share of the company. Everything else is a distraction.

  • Report this Comment On August 22, 2012, at 2:37 PM, Darwood11 wrote:

    Alyce, good article.

    I don't know if "boycott" is the best approach. But I admit that I temper my enthusiasm for companies that use such a dual-class structure.

    One method i use is to complete my evaluation and then "divide by two" whatever conclusion I reach. That means purchasing 1/2 the stock I might have otherwise considered.

    The consequence for me is that it frees up some capital which I can use to purchase other assets.

    It also rewards companies with founders who I consider to have sufficient vision, acumen or just good luck to run a company I'm willing to invest in.

    It's a kind of a "win-win" situation in which I have to look further afield for places to invest my hard earned capital. In the end, I consider that I am the one who truly "won" in this situation. After all, I'm the one who has to expend a bit more effort and turn over a few more rocks, looking for morsels.

  • Report this Comment On August 23, 2012, at 10:01 AM, ourporch wrote:

    Don't feel the existence of dual-class stock should be used as a metric for deciding to buy a stock. More important to me is - does it pay a good (>4%) dividend, is it a well run company, does it have an excellent record of paying and raising dividends, are the dividends sustainable. I need income, therefore I look for great stocks that pay sustainable dividends and have a low (<.75) beta. Don't really care who owns the stock. If any of the metrics I mentioned change drastically or the share price drops 15% below it's 52 week high, it's out of my portfolio and replaced by a better stock.

  • Report this Comment On August 23, 2012, at 10:15 AM, SuntanIronMan wrote:

    While I definitely agree with you in principle about the dual-share structure, in practical terms I'm not sure how much it really matters for us small investors. Whether my one vote per share is the same as the CEOs one vote per share, it does not make too much of a difference. I'll still only own a few thousand dollars worth shares, while the CEO will own a few million of dollars worth of shares.

    Obviously in aggregate it matters (my couple of votes combined with the votes of other small retail investors). But individually my personal voting power will always be extremely small compared to the insiders. So the dual-share structure is low on the list of factors that determine if I think a company is a good buy or not.

    Whether Facebook, Zynga or Manchester United have a dual-share structure is besides the point. Facebook, Zynga and Manchester United are (in my opinion) bad companies to own (regardless of the share structure). If they switched tomorrow to a single-class structure, I still wouldn't want to own any of those three.

    But like I mentioned at the beginning, I completely agree with you about the principle of the matter.

  • Report this Comment On August 24, 2012, at 11:12 AM, stevedahnke wrote:

    These corporations have no trouble foisting their political/cultural/moral views on the public by virtue of their increased access to media via their large capital reserve. At the same time, by having a dual-class share ownership structure, they are essentially tell people, "Just give us your money and don't worry your pretty little head about what we do with it." I call BS.

    And I'm sorry, but I feel if someone doesn't care what a company does with their money, they are on the same moral plane as the company they gave their money to.

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