Average Shareholders Likely Oppose Google's Dual-Class Voting Structure

What's the best way to defeat a proxy proposal? Make sure you control the majority of the votes!

That's exactly what Google (NASDAQ: GOOGL  ) did, and a close examination of this year's proxy voting results suggests that average shareholders don't like it.

How Google's capital structure limits shareholder power
Google currently has a dual-class voting structure that ensures that not only will it get its way in all director elections, but it will also be able to soundly defeat any shareholder proposals pushing for changes to its corporate-governance structure.

Within this structure, insiders' Class B stock has 10 votes per share and average shareholders' Class A stock has one vote per share. Because of this situation, Google co-founders Larry Page and Sergey Brin, along with Chairman Eric Schmidt, control about 64% of share votes.

In addition, Google plans to introduce a new class of shares in the future -- Class C stock -- that lacks voting power altogether, allowing these insiders to acquire additional shareholder capital in the future without diluting their voting power.

What average shareholders think
In a 2013 shareholder proposal pushing for Google to change this capital structure to give all shares an equal number of votes, sponsor John Chevedden argues that the current system allows Google to use shareholders' capital without giving them the power to hold management accountable for how they run the company.

And it appears that most average shareholders agree with his objections.

Let's first consider last year's proxy voting tallies. As I argued in a previous article, if all Class B shares were cast against the equal-voting-rights proposal (which they probably were, since they're owned by insiders), then more than 78% of votes cast by average outside shareholders supported the proposal.

This year's result also appears to show substantial support for equal voting rights among average shareholders. In interpreting the following tallies, note that Google insiders control about 70% of votes.

  • Votes for: 180,758,723
  • Votes against: 551,282,594
  • Abstentions: 1,389,531
  • Broker non-votes: 26,365,754 

If I'm right in assuming that Google insiders voted all their shares in favor of management recommendations, then nearly 80% of average outside shareholders at Google supported the proposal this year. In other words, the vast majority of average shareholders probably support equal voting rights.

Management's counter
Google argues that its multi-class voting structure prevents shareholders with a short-term mind-set from interfering in management decisions that create better long-term returns for investors. Other organizations with multi-class voting structures offer similar arguments, including Facebook, Groupon, LinkedIn, and Zynga.

The idea that shareholders can foil management decisions that promote long-term growth has some merit. Consider Berkshire Hathaway, which also has a dual-class voting structure. Limiting the power of Class B shareholders to guide management decisions may have contributed to Warren Buffett's success in leading Berkshire to generate such good returns for his long-term shareholders.

It's important to note, however, that Class A stock at Berkshire isn't limited to insiders as it is at Google. Buffett's leadership, of course, serves as the exception rather than the rule, and his track record suggests that he can be trusted to do what's in the best interests of shareholders. Call me crazy, but I'm guessing that a greater percentage of average outside shareholders would support Berkshire's dual-class capital structure than the percentage of average outside shareholders supporting Google's structure.

The Foolish takeaway
Because of the lopsided voting power among insiders and outsiders, it would have been surprising if the equal-voting-rights shareholder proposal passed. However, I believe management's resistance to this change despite the high degree of average shareholder support should send a message to investors that insiders like Page, Brin, and Schmidt see Google as their company rather than the shareholders' company. And this mentality is dangerous for investors.

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12/18/2014 4:00 PM
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