Snap's Experiment in Totalitarian Capitalism
Just how outraged should we all be about the corporate governance arrangements at Snap Inc., the Venice, California-based purveyor of spectacles and disappearing videos that went public last week? According to some people, very outraged.
“The biggest problem with the IPO,” wrote CNN Money’s Paul La Monica, “is the fact that any investor who buys the stock will have absolutely no say in how the company is run.” Snap, complained Brooke Masters of the Financial Times, “has a governance structure that is straight out of a banana republic.” Rob Cox of Reuters BreakingViews termed it “totalitarian capitalism.”
It is indeed true that the class A shares that Snap sold to the public last week come with no voting rights at all. It is also true that this is something new. As Snap put it in its IPO filing:
Although other U.S.-based companies have publicly traded classes of non-voting stock, to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange.
Snap also has class B shares, held by executives and early investors, that come with one vote apiece. But it is the class C shares, which come with 10 votes apiece, that control the company. And they’re all in the hands of Snap co-founders Evan Spiegel and Robert Murphy.
What a couple of tyrants! But this is a corporation we’re talking about, not a nation. Condemnations of “banana republic” governance and “totalitarian capitalism” imply that “democratic capitalism” is the ideal. Is it, though?
For starters, even companies where every share comes with one vote represent an odd sort of democracy. It’s one share, one vote, not one person, one vote. And unlike citizens, shareholders aren’t subject to any sort of naturalization requirements -- they can buy and sell shares in an instant. Meanwhile, lots of other investors (bondholders, most obviously) don’t get votes. Not to mention other important stakeholders: In Germany, it’s customary for employees to have a formal say in corporate governance. Is that more or less democratic than giving all the votes to shareholders?
There is a theory that, as the “residual claimants” to a corporation’s cash flows -- that is, the people who get paid after everyone else does -- shareholders are uniquely suited to make decisions that maximize a corporation’s economic value. There’s also the simple argument that, as the corporation’s owners, shareholders should be able to tell its executives what to do. There are also, however, legal scholars who argue that shareholders aren’t the only residual claimants and technically aren’t the owners, either. Corporate law is hard!
Even if you believe in shareholder primacy, there remains the question of which shareholders. A lot of people seem to think that committed, long-term shareholders should get more say than those who can bail out at any moment. There are various ways to accomplish this -- among them the dual-class share structures at companies such as Alibaba Group Holding Ltd., Alphabet Inc., Facebook Inc. and Twenty-First Century Fox Inc., which give certain shareholders (usually the founders) many more votes per share than others. Snap’s share structure is simply a more extreme version of this.
Scholarly opinion on these dual-class arrangements seems to be shifting. It used to be that they were seen mostly negatively, because they make hostile takeovers harder and thus remove a source of discipline for corporate managers. Now, though, one can find journal articles arguing that dual-share arrangements encourage long-term investment by corporations, and even make outside shareholders richer.
Snap, as noted, has taken things to an extreme. It’s not just that outside investors get zero votes. It’s also that, as New York Times “Deal Professor” Steven Davidoff Solomon described in a column last month, “the only way the two founders are ever really going to lose control of Snap is if both die.” By contrast, he wrote:
Google has a sunset provision on its dual class shares, while Mr. Zuckerberg is going to give up his ability to control Facebook if he leaves the company with the issuance of Facebook nonvoting stock.
So it may be that Snap’s experiment in founder entrenchment goes too far. Investors don’t seem to have a problem with it now -- as of early this afternoon they were valuing the company at $29 billion. But investors can change their minds.
Still, I think there’s more to be gained than lost in letting companies experiment like this. In some places, they can’t: The Hong Kong and Singapore stock exchanges ban dual-class shares, and in the U.K. they’re strongly discouraged. I’m not aware of any evidence that those countries produce better corporations as a result.
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