It's tough to be a Google (GOOG) shareholder -- unless your name is Larry Page, Sergey Brin, or Eric Schmidt. At Thursday's quarterly report, instead of starting to issue dividend as many shareholders were hoping, Google decided to split its stock -- in a wacky way: the new shares will have no voting rights, thus tightening the iron grip the three Google executives (Page, Brin, and Schmidt) already have on Google.
Google currently has two classes of stocks: the founders' shares represent 10 votes each, while regular shares represent 1 vote each. This already gives the founders 66% of Google's voting rights. This, however is changing slowly while Google constantly issues grants to its employees and uses stock for acquisition, thus diluting the percentage of voting rights for the founding trio's shares. Over the ten years between 2002 and 2012, Google's shares changed from 257 million to 327 million shares. Another 30% share dilution could put the regular shareholders' voting rights over 50%. Using this "special" split by issuing non-voting shares, CEO Larry Page has basically allowed Page, Brin, and Schmidt to sell their shares without losing any voting power, and made it possible for Google to dilute existing shares without increasing regular shareholders' voting power. At this rate, Google shareholders will not be able to have about 50% voting rights in their lifetime. I mean, wow.
This is not the first time Google has "screwed" its shareholders at the pleasure of its founders. In 2010, Google left China over a political dispute, surrendering the most important growth market for the company to its Chinese rival Baidu (BIDU). Baidu has since then pretty much taken over the Chinese search market and enjoyed a stellar 45% profit margin (as compared to Google's 25%).
Dual class shares have its advantage, such as fending off potential hostile takeovers, allowing the company to focus on long term strategies instead of making only tactical moves to improve short term profitability. But it also can be a dangerous pitfall for shareholders without special voting rights. It increases the uncertainty that the CEO makes very bad decisions just because he can (in the case of Google quitting China). Sometimes being impossible to be taken over can suppress stock value. For instance, Under Armour (UA)'s CEO Kevin Plank has more than 50% of the voting power. This for years has been preventing Under Armour from being acquired by a bigger fish like Nike (NKE) or Adidas. New York Times Co. (NYT) also has overwhelming voting rights with its special shareholders. It prevents New York Times from being acquired like Wall Street Journal. The stock price has been badly beaten during difficult times without hopes of an acquisition.
Both for booming companies such as Under Armour and for depressing companies such as New York Times, dual class voting share structure can be negative news for regular shareholders. It can have a similar effect on Google. So is there anything Google shareholders can do? Not much other than to sell shares and become non-shareholders. But the unlimited power given to Page, Brin, and Schmidt is certainly something every Google shareholder should be always be aware of, and possibly be reminded each time Google makes a wacky decision like this split.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.