Many companies in the stock market have dual-class shares, and there are plenty of reasons to hate these types of shares. Some investors think it's unfair for a small amount of shares to control a massive amount of voting power – essentially making common shares inferior. According to Detroit News, a record number of Ford (NYSE:F) shareholders – 33.4% – supported a plan to end the Ford family's special class of shares. Is this something that current and potential investors should worry about? Let's review the details and look at the big picture, and then you can decide for yourself.
The Ford family special class of stock is worth about 40% of voting power from roughly 4% of total equity. It's had this control since the company went public way back in 1956, with the original purpose being to keep the company in the hands of family members while selling shares to the public to help finance growth. Fast forward more than 50 years, and generations of Ford's family, and the story remains the same.
Generally when founders and executives have large ownership in the company it's viewed positively, and tends to improve performance. However, when founders or family own large percentage of voting power it can lead to decisions made by the few with the risk mostly pushed onto common shareholders. This can be especially worrisome in Ford's case because, let's be honest, a majority of the family hasn't needed to work a day in their lives, and therefore are not necessarily the people investors want making decisions.
Having this distorted voting power can become even worse as time drags on. Eventually family members can split, become uninformed, or lose interest in the common shareholder. If and when that happens, companies with dual-class stock can spin out of control quickly, and that's why investors and Wall Street dislike special shares.
If that has you worried as a Ford investor, don't be – at least not yet. Here's why.
The difference with Ford lies in a request that CEO Alan Mulally's made as he came on board in 2006 to save the failing company. He requested that Bill Ford, Jr. take care of the family side of things and control the family to back his decisions 100%. In addition to Mulally's proven leadership, Bill Ford is a well-informed, proven executive, and this helps mitigate one of the biggest downsides to dual class shares – uninformed family decisions.
Mulally and the Ford family have been on the same page, and is evident in the decision made years ago to suspend Ford's dividend payments – which have since been reinstated. The Ford family receives a huge amount of income from dividends, and since they backed the decision then, it shows their interest was truly aligned with common shareholders in turning the company around.
For now Ford investors have little to worry about as the family decisions are made through proven management and leaders. In some ways the special class of stock can help the stability of a company since family members typically aren't as short-term oriented as the rest of Wall Street.
The record percentage of shareholders voting against the family's special shares could be anticipating of the future. With Mulally's retirement nearing, and fewer of Ford's family involved in executive management, the 40% family voting power could cause problems in the future. It's definitely something investors should be knowledgeable about.