2013 Millstein Forum: Dual-Class Structures, Pro and Con

Sorry to be late and abbreviated in getting out my coverage of this great forum. Be sure to check out the Forum’s photo gallery, which contains many more and much better shots than what I took between notes and conversations.

The second panel discussed the growing issue of dual-class stock structures. While there was considerable debate, my sense is that most in the room see the advantages of such structures do not outweigh the disadvantages. I would like to see more discussion in the broader press about these issues when dual-class companies are going public. Maybe the discount would be even steeper.


Dual-Class Panel

Moderator: Jeffrey N. Gordon, Richard Paul Richman Professor of Law, Columbia Law School. Panelists as follows:

  • Charles M. Elson, Edgar S. Woolard Professor of Finance; Director, John L. Weinberg Center for Corporate Governance
  • Michael D. Fricklas, Executive Vice President, General Counsel and Secretary, Viacom Inc.
  • Spencer G. Smul, Senior Vice President, Deputy General Counsel and Secretary, Estee Lauder Companies
  • Jon Lukomnik, Executive Director, IRRC Institute; Managing Partner, Sinclair Capital

There has been a wave of dual-class offerings, especially in Silicon Valley. Is that shift progressive for the long-term or regressive? 14% of tech firms from 2011 had dual-class compared to 6.4% 10 years earlier. Google was something of watershed. Underwriters aren’t pushing back. VCs like dual-class because companies have insulation from public market pressures. However, not everyone so keen. CalPERS/CAlSTRS are threatening a boycott. CII filed petition to ban. Can do dual-class through IPO but can’t generally change the voting rights of stock that is already listed. The primary issue back in 1926 re dual-class was banker control. Now, the argument is that it allows the business entrepreneur to maintain integrity and control.

In many cases dual-classes and rights are designed to revert but there isn’t consistency. Following the UK’s Colin Mayer, some see this diversity of organizational form as important. Read my coverage of a talk by Mayer at Stanford, Why the Corporation is Failing Us and How to Restore Trust.

Arguments in favor include the idea the dual-class structures insulate the board form pressures, allowing the press, for example, to have editorial integrity. Genius theory needs lots of running room over time. Nifty anti-takeover device. Give them the ability to do what they need to. Cost/Benefit analysis. Benefit – can run for long-term.

Among the costs: The board can easily become immaterial, even though legally required. That puts directors in a tough position, since it is impossible to cross the controlling shareowner. You can be independent once and that’s it… you’re fired. Malfeasance is a most malignant issue. Misfeasance. Management getting themselves into trouble. The world’s smartest guy isn’t always going to be the smartest on every issue. You want a good board to prevent problems.

So, the theory we seem to be headed for is  “let the buyer beware.” Everyone knows at the IPO stage and there is a discount at the offering. Other argue, you can consent to someone murdering you, but it is still murder. The monitoring function shifts from the weakened board and is externalized to third parties: government, regulators. When you export monitoring to third parties there are costs to the public and that’s a powerful argument against it.  Sunsetting after some period of time might help but the consensus of most in the room appeared to be the costs outweigh the benefits.

Examples were provided of companies were dual-class structures have performed better over a substantial period of time and where CEOs have encouraged boards to voice their criticisms, resulting in occasional changes of direction.

Cited study that shows dual-class shares discounted. Long-term projects suffer. Boards believe shareowners are short-term and they pass up productive long-term projects to focus on next quarter. However, we were reminded that correct diagnosis doesn’t equate with treatment. Study of controlled companies comparing single class (30%+ control) and dual-class over a 10 year period showed controlled companies only out-performed in 1 year timeframe. Generally, they had more stock-price volatility and twice as many related-party transactions. The method of control matters. Single-class outperformed and are less volatile. Multi-class companies did the worst in both stock appreciation and volatility. You need something to offset the misalignment of interests. The conclusion of most was that having a dual-class structure is not the preferred recipe for solving short-termism.

Investors expressed their opinion that we can’t exercise our fiduciary duty if we have no voice on the board. They questioned whether in-breeding is our best evolutionary strategy. When it isn’t going well, you can’t do anything about it. Perhaps indexed portfolios will be tilted to account for rights.

Supplementary materials:

  • Bolton, Patrick and Frederic Samama.  L-Shares: Rewarding Long-Term Investors. ECGI Finance Working Paper Series.  Dec. 2012.  Click here to view.
  • IRRC Institute. New Study Says Multiclass Voting Companies Underperform, Riskier.  Oct. 2012.  Click here to view.
  • Wong, Simon C. Y.  Rethinking ‘One Share, One Vote’.  Harvard Business Review Online.  Jan. 2013.  Click here to view.

See also, Millstein Forum 2013: The Impact of New Patterns of Corporate Ownership.


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