The plan of Google (GOOG) to create another class of common stock has provided much fodder. Already having a dual stock structure with super voting powers for company insiders to maintain control, Google will soon have a third non-voting class of shares. Professional and amateur journalists alike have railed against Google founders Larry Paige and Sergey Brin for being paranoid and unfair while questioning the corporate governance practice with threats and appeals to democracy. Even Wall Street analysts are cool to the idea.
Misunderstandings abound. Corporate governance complaints ignore the voluntary nature of private sector dealings. Even those who accept the practice miss the important reasons for support. Perhaps complaints of insulating decision makers from accountability ought to stand next to instructive examples.
In the recent financial crisis, both General Motors (GM) and Chrysler went through bankruptcy reorganization. Their common stock shareholders were wiped out. Ford (F) survived and its common shares have recovered substantially. Perhaps Ford's duel share structure, giving the Ford family 40% voting control with 4% of the economic shares, played a major role in positioning Ford to survive and thrive.
Teck Resources (TCK) also has a dual stock structure. From page 13 of its 2009 annual report: "Our shareholders approved our dual share structure in 1969 by way of a corporate reorganization in which all of its then outstanding shares were converted into Class A shares carrying 100 votes each. Subsequent to that date, no additional Class A shares have been issued, other than when stock splits of both classed of shares have occurred. All public share issuances, mergers and corporate takeovers have been implemented or enable by issuing Class B shares, which carry one vote each. The objective of the founders of Teck was to build a major Canadian diversified mining company with a global reach and this is facilitated by our dual class share structure."
Importantly, the dual share structure keeps companies from being purchased in whole prior to being to large to be acquired. Without the super voting rights Teck Resources certainly would have been bought out long ago. Massive long-term gains would not have been realized for the immediate gratification of a one-time 30% pop.
Focusing on the long term has allowed $1,000 invested in Teck Resources in 1975 to grow to $160,000 today. The freedom to focus on the long term is a key for value creation. Management teams influenced by outside and short-term pressures will not make the same decisions and investments. Imagine if Steven Jobs has super voting rights and had not lost a power struggle with the board of directors in 1985 at Apple (AAPL).
Protections exist for shareholders of subordinate voting shares. Their economic interest may not be compromised because of their lack of voting power. All common shares are treated equally with respect to dividends.
Google's announced stock dividend creates a third class of common shares. Keeping multiple share structures simple is desirable. Perhaps optimally, Google would have a dual share structure. The key idea is for management to be free to build the business unhindered from loud and opinionated outsiders.