Silicon Valley’s commitment to shareholder democracy – or to public shareholder democracy as opposed to the influence wielded by venture capital firms – does not seem to be strong.
The news that Facebook has established a dual-class share structure, converting its existing shareholders to Class B stock carrying 10 times the voting rights of Class A shares, suggests that (despite its denials) Facebook is readying itself for an initial public offering.
It is also falling in line with Google, which created a dual-class share structure for its IPO in 2004, which also gave 10 times the voting power to some shareholders. Eric Schmidt, the company’s chief executive, and Larry Page and Sergey Brin, its co-founders, control the majority voting rights as a result.
Mr Page and Mr Brin wrote of this arrangement in their founders’ letter to shareholders:
“While this structure is unusual for technology companies, similar structures are common in the media business and had a profound importance there. The New York Times Company, The Washington Post Company and Dow Jones, the publisher of The Wall Street Journal, all have similar dual class ownership structures. Media observers have pointed out that dual class ownership has allowed these companies to concentrate on their core, long-term interest in serious news coverage, despite fluctuations in quarterly results.”
Five years on, Google is doing a great deal better than the models for its dual-class share structure, with the possible exception of the Bancroft family, which cannily sold out to News Corp for $5bn in 2007. That raises the question of whether such structures really protect long-term shareholder value.
Whether or not they do, Silicon Valley founders such as Mark Zuckerberg seem to like the idea of being able to sell shares to the public – making themselves rich in the process – without relinquishing control. It is a nice arrangement if you can get it.
Another devotee of the dual-class share structure is Rupert Murdoch, who is now locked in combat with Google, making it a fight between B share-protected species.
