I've been spending a lot of time over the last few months, listening, reading and thinking about the public/private tech landscape. It's become clear that for a number of reasons including increased compliance/regulatory/reporting requirement, shrot-term focused public markets and risk aver shareholders companies are being incentivized to stay private longer.
I wanted to look at a corporate governance mechanism being talked about and used by many of the major technology companies that have gone (Facebook, Google) or will go public, the dual-class stock structure. It basically gives a small number of employees, usually co-founders and management something like 2-1 or 10-1 voting rights, which allows them to retain a majority control of their company after going public. To quote Marc Andreessen, it allows founders to "create a fortress" around their company, in turn they are able to operate without having to bow to pressure from activist investors and mutual funds (are all shareholders created equal is an entirely different question). They can reinvest in growth instead of eating themselves via dividends and buybacks. This emergence of dual-class stock structures is a natural consequence of the hostile, short-term public market environment and I believe when practiced wisely it will allow companies to innovate, plan for the long term, and make bets on new untapped markets. Basically, do all the things we want tech companies to do.
This isn't just important for the employees and shareholders of tech companies but for all of us who rely on them to drive the outsized returns in the public markets and more importantly to improve the human condition over time. The more companies that can invest in growth the better off humanity is in the long run. I believe you could go as far as to argue that it is a moral imperative to foster as many innovative tech companies as possible because without growth democracy doesn't work.
I'd like to peer into the future and understand how prevalent dual-class stock companies will become? Should we expect more of the hot tech IPO's to use this mechanism? And if this type of corporate governance does become the norm what types of push-back is there going to be? How will hedge funds, activist investors and mutual funds react? They're obviously not going to like the lack of influence they can exert, but what could they/society do to buck the trend?