The practice of companies imposing dual-class share ownership over an indefinite time frame goes against US values and is bad for investors, according to one of the most senior securities regulators.
In his first public remarks as a member of the SEC, Robert Jackson acknowledges that there are reasons to argue a dual-class structure can be beneficial – for a limited time – in that it allows entrepreneurs to take a long-term approach to building a company without being subject to short-term market pressures.
But he also notes that almost half of the companies that went public with dual-class structures over the last 15 years gave corporate insiders powerful voting rights with no time constraints. ‘Those companies are asking shareholders to trust management’s business judgment – not just for five years or 10 years, or even 50 years. Forever,’ he says.
‘So perpetual dual-class ownership – forever shares – doesn’t just ask investors to trust a visionary founder. It asks them to trust that founder’s kids, and [his] kids’ kids, and [his] grandkid’s kids… It raises the prospect that control over our public companies, and ultimately of Main Street’s retirement savings, will be forever held by a small, elite group of corporate insiders – who will pass that power down to their heirs. I cannot see how to square that with our nation’s foundational ideas. In America, we don’t inherit power, and we don’t hold power forever. We fought a war against that system, and the good guys won.’
Jackson adds that although public markets are not governments, the US ‘spirit of democratic accountability has long animated how we think about economics.’ He argues that, ‘[s]imply put: asking investors to put eternal trust in corporate royalty is antithetical to our values as Americans.’
In practice
Jackson and his team have studied 157 dual-class initial public offerings (IPOs) that have taken place over the past 15 years. According to the commissioner, there are ‘pretty significant differences’ between the 71 dual-class companies with sunset provisions and the 86 without such time limits. For example, he says, seven or more years after their IPOs, companies with perpetual dual-class stock trade at a significant discount to those with sunset provisions.
The preliminary analysis also finds that, among the small subset of firms that decided to drop their dual-class structures later in their life cycles, those decisions were associated with a significant increase in valuation.
One response to dual-class structures has been for some indexes to exclude certain firms. But doing so across the board, Jackson says, is ‘a blunt tool. And it’s one I’m deeply worried about.’ He argues that if all dual-class companies are banned from major indexes, retail investors may be excluded from being a part of the growth of the most innovative companies. ‘The next Google or Facebook will deliver spectacular returns, but average Americans will, quite literally, not be invested in their growth,’ he says.
Instead, Jackson urges securities exchanges to consider proposed listing standards designed to address the use of perpetual dual-class stock. ‘Companies would still be able to [carry out an] IPO with dual-class voting arrangements – but only if management is willing to someday give shareholders their say,’ he says.
