The midterm elections are Tuesday, and the stakes are high. Of course, the stakes are always high in elections, but this year seems to be particularly motivating for many Americans.
Case in point: Early voting in Texas has already topped that of 2016 — and is more than all 2014 ballots cast in the state. As Americans, we should all be glad to see such civic engagement. Voting is the single most important act we have as individual citizens to hold our government accountable.
As investors, however, similar democratic notions on Wall Street are increasingly under attack. In select cases, publicly traded companies are doing everything they can to ensure that a powerful few have carte blanche to run the business as they please.
Sure, some shareholders may be happy to cede any input on operations as long as their stock is rising. But in some of these cases, there are serious concerns about this may actually result in long-term risks.
And worse, many of these stocks with near-dictatorial power structure are big-time corporations in major stock indexes like the S&P 500 SPX, +0.09%
Here are five of examples of these undemocratic corporations that are structured in a way that takes power away from shareholders and puts it in the hands of a select few.
Tesla
Sure, the Securities and Exchange Commission has strong-armed Elon Musk into relinquishing his chairman title after ill-advised tweets in August hinted that Tesla Inc. TSLA, -2.74% would be going private. But he’s still the CEO. Most importantly, he is the largest shareholder of stock, with over 20% of shares in his sole possession
Even more interesting lately is that amid all the kerfuffle (and a related $20 million fine from the SEC), Musk has been ponying up some serious cash to maintain his power. Insider transaction history shows the acquisition of 28,500 shares worth roughly $9.5 million in October. That comes after 72,500 shares in various June transactions worth roughly $25 million.
The most obvious example of Musk using this power in both the C-suite and over shareholder voting rights is via the 2016 acquisition of Solar City — a company where, conveniently, Musk was also the top shareholder, chairman and the CEO. That move has resulted in a class-action lawsuit in which a judge ruled in March that “it is reasonably conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in connection with the acquisition.”
Musk was quoted in 2013 as saying: “I will be the last one to sell shares” in part because he wants to move Tesla toward his long-term vision regardless of what puny mortals like us think. Investors should expect this trend to continue, then, not to wane over time.
After Facebook Inc.’s FB, -1.74% a public grilling on Capitol Hill in April, some investors may have been fooled into thinking that the company and its CEO, Mark Zuckerberg, may somehow be held accountable by the public. That’s not exactly the case.
As part of Facebook’s IPO structure, Zuckerberg and a small group of insiders were granted super-powerful Class B shares of stock. And while this club nominally controls a little less than 20% of the company, those shares actually care 10 votes apiece. In fact, even if his peers turn against him, Zuckerberg controls more than half of the actual voting rights in Facebook.
It’s all well and good to see Boy Wonder appear before Congress and dutifully address concerns. But you can be sure that Facebook’s approach toward privacy is going to be driven by its internal goals and Zuckerberg’s vision much more than any potential shareholder pressure.
Even worse, the Facebook CEO concocted plans in 2016 that would have created a new segment of powerless Class C stock with zero votes per share, filed with the SEC under the title “Preserving Founder-Led Structure to Focus on the Long Term.” That plan hasn’t yet been pushed into reality, but it tells you what the future holds for public shareholders who think they will ever have a say.
Alphabet
Speaking of powerless Class C stock, it’s easy to see where Facebook’s founder got his inspiration. Google parent Alphabet Inc. GOOG, -3.15% GOOGL, -3.09% split its shares in 2014 to offer a Wall Street a nominally lower share price — and much less voting power as a result.
Existing shareholders were given one share of new Class C nonvoting stock for each share of Class A voting stock they already owned. That didn’t dilute past power that public shareholders had consolidated, but did allow management to stop the slow erosion of their regime; insiders and employees had slowly sold out over the years and allowed more public influence over governance, so now stock can be used for awards and acquisitions without fear of that trend continuing. The icing on the cake is that there are also Class B shares that are not publicly traded, which like Facebook carry 10 times the voting rights.
Investor concerns about this move have seemingly evaporated as shareholders shrug and simply take comfort in a rising valuation. As of today, shares of Class A (GOOGL) trade for a meager premium of about 1% over Class C (GOOG) shares compared with valuation gaps of more than 5% back in August 2015.
Maybe that’s because whether you own Class A or Class C shares is a moot point, founders Sergey Brin and Larry Page control about half the company between them. Just look at the rather brutal outcome of a 2017 proposal by shareholders that all classes of stock count for 1 total vote in corporate governance — 472.6 million votes were tallied against the move, and 191.7 million votes for the move, with Brin and Page single-handedly accounting for over 390 million of the “no” votes. That is a clearly quantified indicator of how insiders hold the power.
Snap
The new kids in Silicon Valley have learned from the older, power-hungry generation of executives. Snap Inc. SNAP, +0.88% is evidence of this, with founder Evan Spiegel making the dramatic decision to go public with shares of the company — but offer those new shareholders zero say, with no voting rights tied to those shares.
In fact, it wasn’t just post-IPO investors who got shafted. Spiegel and co-founder retained roughly 70% of voting power, as those who invested even before the IPO were granted less-powerful voting shares. Think of it as a proactive ABC class structure, on steroids.
Immediately after the 2017 IPO, Snap stock ran into a heap of trouble as Spiegel absurdly compared dominant competitor Facebook to Yahoo and downplayed the very serious concerns of the Wall Street community. He caught the ire of many an investor, including the iconic Jim Cramer, who called him “arrogant” and urged humility and perspective.
But a decline in share prices never resulted in a decline of the founder’s influence over strategy and governance. Even with shares down a staggering 70% from the first printed price of about $30 back in early 2017, you can be sure management is going to continue to do its own thing thanks to that stranglehold on voting rights.
Alibaba
If you think these tech companies are pretty brazen in their governance structure, you haven’t seen anything yet. Alibaba Group Holdings BABA, -1.84% went public in 2014 with perhaps the boldest structure of them all. In this case, Chinese rules against foreign ownership wholly protect overseas assets from any claims by American investors via a “variable interest entity structure.”
Who owns Alibaba’s Chinese operations, then, if this is a public company and American shareholders are prohibited? Why, CEO Jack Ma and fellow co-founder Simon Xie, that’s who. That’s why the name of the company is Alibaba Group Holdings, with one such holding being a Cayman Islands subsidiary that is a pass-through entity for profits from Alibaba China.
If that sounds like grounds for shenanigans, it gets even better: The governance structure is that of a partnership, where 36 insiders have exclusive power of the board of directors. If shareholders make a fuss, governance rules explicitly give the partnership power “in its sole discretion and without the need for any additional shareholder approval.”
Some have made a fuss about Jack Ma’s recent moves to step back from the company as a sign of confidence in the future, and in the role of new leadership. But let’s not pretend he is going to relinquish power of Aliabab’s governance for many years to come, or that U.S. shareholders will ever get much of a say.
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