Dual-class shares: cult classics

If Silicon Valley is a cult, company founders are its prophets. So dual-class share structures fit right in. For, as every brainwashed burnout knows, our leader loves us, and is very wise indeed.

Many of the valley's most successful companies have dual-class structures, which allow founders voting control without owning a majority of shares. But occasionally a devotee gets uppity. A shareholder in Facebook, in which Mark Zuckerberg has 55 per cent of the votes and 15 per cent of the economics, has proposed a one-share one-vote resolution.

Facebook's ownership regime is probably of little concern for most investors. The company has been performing brilliantly, with the share price doubling since its 2012 listing. But one does not have to look far for a cautionary tale. At Zynga, the video game company, Mark Pincus has 63 per cent of the votes and 6 per cent of the ownership. After the company went public in 2011, Mr Pincus ran the share price into the ground with a series of missteps. After stepping aside for a few years, he announced last month that he was coming back as chief executive, promptly sending Zynga's share price even lower.

In the abstract, the problem with dual-class structures is that ownership without control and the converse are inherently conflicted. The practical problem is that a dual-class company can be stuck with its founder.

Facebook is not facing Zynga-type problems yet. And not every company will have to outgrow its founder. But one study, conducted by the Investor Responsibility Research Institute, suggests that controlled companies with a single-class share structure outperform controlled companies with multi-class structures over five and 10-year periods. In other words, it pays for the founder to have economic skin in the game to match his or her voting rights. The resolution at Facebook is unlikely to pass. But Mr Zuckerberg and his followers ought to meditate on it, all the same.

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