It irks investors in America, and now it’s irking them in Europe too. The U.S. stock market’s permissive attitude to initial public offerings that give founders super-voting rights is the subject of an international campaign. Rightly so. The U.S. new-issues market is the de facto standard setter for the rest of the world. Undemocratic voting structures are an unwelcome export.
The “one-share, one-vote” principle is fair and gives outsiders some sway to hold management to account. True, Google parent Alphabet Inc.’s stock has thrived with dual-class shares giving its founders control. It looks like an the example of how an imbalanced structure facilitates longer term decision-making than institutional investors might otherwise tolerate. But it’s the exception.
Shares in Snap Inc., Altice USA Inc. and Blue Apron Holdings Inc. have performed terribly since going public in 2017. The controversies swirling around Facebook Inc. raise questions about whether founder CEO and Chairman Mark Zuckerberg’s dominant position still benefits the company.
Of course, no one is forcing investors to buy a stock with imbalanced voting arrangements. And removing super-votes would usually leave incumbent management with a controlling stake still. The tech companies argue that “founder control” supports long-term investment decisions. Index providers are creating separate indices that exclude stocks with bad voting structures. But academic research backs up fears that inequitable structures become a liability more often than not. It would be better if stock exchanges cleaned up the market overall.
In October, the Washington-based Council of Institutional Investors proposed that dual-class share structures should automatically end within seven years of listing, unless independent shareholders approved an extension. This “sunset” arrangement is a pragmatic and proportionate response that simply requires founder dominance to prove its worth. A group of European funds speaking for $1.7 trillion of assets, including Legal & General Investment Management and the Dutch fund PGGM, last month wrote to the New York Stock Exchange and Nasdaq to endorse it.
The global exchanges compete with each other for IPOs. This dynamic influences their standards. The U.S. stock market is the world’s biggest pool of capital, which puts pressure on other venues to lower their standards to lure business. As such, America has a special duty to show leadership on this subject.
For now, the exchanges are making no promises. Nasdaq’s president Nelson Griggs has said his exchange is a believer in the “flexibility of share structure” for the sake of providing all investors with access to growth companies, while adding that it keeps standards under review.
The good news is that a lower proportion of American companies listing in the U.S. in the first nine months of 2018 had dual-class structures than in the whole of 2017, according to the CII. Of those that did, the proportion with sunset clauses went up. The trend is encouraging, although it doesn’t apply to foreign companies listing in the U.S. But that shouldn’t take the pressure off U.S. regulators to set standards to which the rest of the world can aspire.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper