What's the best way ensure that you and your favorite candidates win an election? Make sure you control more than half the votes.
This strategy has worked well for Sheldon Adelson -- the founder, CEO, and chairman of Las Vegas Sands (NYSE:LVS). But it prevents shareholders from holding him and his board of directors accountable for decisions that may compromise the long-term value of their investments.
Adelson's Majority Ownership
As Las Vegas Sands disclosed in its 2012 10-K, Adelson, along with his family members, trusts, and other entities established for him and his family, beneficially owned more than 50% of the company's common stock as of the end of 2012.
What does this mean for outside shareholders?
Any decisions that rely on the approval of shareholders, including bylaw amendments, merger approvals, and changes in the control of the company, are largely controlled by Adelson and his family. And, as the 10-K clarifies, "The interests of Mr. Adelson may conflict with your interests."
In other words, if you don't like Adelson's leadership, the leadership provided by Las Vegas Sands' board, or the bylaws that govern their behavior, then tough noogies. No matter how much support you garner for your position among the average shareholder, their votes will never outnumber his.
Risks at Las Vegas Sands
If shareholders could trust Adelson to act in the best interests of shareholders at large, then perhaps they wouldn't have reason to worry about the fact that he controls the majority of the company's votes. However, I'm not sure we can trust Adelson to do this.
As I argued in another article, disclosures in Las Vegas Sands' 2013 proxy raise my concern that some of his business dealings may further his own interests and the interests of his family at the cost of long-term shareholder value. In addition, I believe the gaming company's recent announcement that PricewaterhouseCoopers is resigning as its auditor raises additional concerns about the riskiness of this investment.
Other Companies with Majority Control
Shareholders will face similar limitations at other major companies, including Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL), where a dual-class voting structure allows insiders to control the majority of share votes without holding a majority of shares. I believe this may cause their interests to diverge from those of average shareholders, with even more frequency than it does for Adelson.
Facebook's most recent 10-Q has a disclosure similar to Las Vegas Sands', which points out that Mark Zuckerberg, the company's founder, CEO, and chairman, "has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets." It also says that he has the power "to control the management and major strategic investments of our company as a result of his position as our CEO and his ability to control the election and replacement of our directors."
Google's most recent 10-Q also contains such a disclosure, which points out that insiders Larry Page, Sergei Brin, and Eric Schmidt together control 64% of shareholder voting power. In a proposal listed in Google's 2013 proxy, one shareholder expressed dissatisfaction with this power structure, suggesting that it allows the company to offer excessive compensation packages that may not be justifiable in terms of long-term shareholder value, including Eric Schmidt's $100 million equity compensation package in 2011 that had no job performance requirements.
The Foolish Takeaway
I believe the Las Vegas Sands and Google cases show that there are concrete risks associated with a power structure in which insiders control the majority of the votes. While it's too early to tell whether Zuckerberg's leadership of Facebook will be shareholder-friendly, I believe investors should watch it closely. When insiders control the majority of share votes, there are always risks associated with the possibility that they may select directors who will push through excessive compensation packages and approve decisions that line their own pockets at the expense of shareholders.
When purchasing shares in a company where insiders control a large portion of the voting rights, I believe shareholders should pay extra close attention to the trustworthiness of the company's leaders to make sure they represent your interests, even when their failure to do so can't cost them their jobs.