Stephen Foley: Are tech entrepreneurs as good as they think?
There is no chance Google’s founders will lose their majority voting power
Stephen Foley is a former Associate Business Editor of The Independent, based in New York. He left in August 2012. In a decade at the paper, he covered personal finance, the UK stock market and the pharmaceuticals industry, and had also been the Business section's share tipster. Between arriving with three suitcases in Manhattan in January 2006 and his departure, he witnessed and reported on a great economic boom turning spectacularly to bust. In March 2009, he was named Business and Finance Journalist of the Year at the British Press Awards.
Saturday 14 April 2012
US Outlook I agree, you are absolutely wonderful, all you Silicon Valley entrepreneurs who have made multibillion-dollar companies. But my God, you are arrogant. Something has to be done about your megalomaniacal disregard for corporate governance norms – before investors get badly hurt.
Larry Page and Sergey Brin, Google's founders, were the first technology bosses to thumb their noses at the conventions of the public markets when they floated their company in 2004, and they raised an eloquent middle finger to their outside shareholders again this week.
They own less than 17 per cent of Google between them, but they already have an iron grip on the company because their shares hold 10 times the voting power of everyone else's. Now Google will start using a new class of non-voting share for employees' stock bonuses and to pay for future acquisitions. That way there is no chance the founders will lose their majority voting power, not in a million years of share dilution.
Only we can be trusted to make the long-term decisions that a world-changing tech company has to make, they bleated in self-justification. If we let all you quarterly-performance-obsessed investors have a say, there probably wouldn't be a YouTube or Android phones or a Chrome web browser.
Messrs Page and Brin might really believe that, but they are not right. Giant corporations from General Electric to Apple routinely make huge long-term (and world-changing) investments, without having voting power concentrated in executive hands.
The main consequence of disenfranchising outside shareholders relates not to the day-to-day running of the company so much as it does to good corporate governance, to the proper checks and balances that keep management honest. Outside shareholders usually only step in when things have gone demonstrably wrong, either because a company's management is destroying value or is paying itself too much or has succumbed to scandal. Messrs Brin and Page clearly don't have anything to fear from outside scrutiny.
The dual class structure was all the rage when family-owned media companies went public decades ago, and look where that got us. Newspaper conglomerates like the Washington Post and the New York Times Company are locked into downward spirals that outside investors cannot pressure them out of. Rupert Murdoch's reign of terrible continues at News Corp.
In other words, it works until it doesn't. Because nothing has gone wrong at Google, and because we fetishise the visionary prowess of a new class of tech entrepreneurs, there have been a host of copycats since Messrs Page and Brin took their company public. Zynga and Groupon are two of the worst offenders of recent months, but at least outside investors can sell these shares if things go breasts-up. A lot of pension funds that track the S&P 500 have to own stock in a company as mighty as Google. The same will be true of Facebook, which is coming to market next month.
Mark Zuckerberg will have agreed with every word of Google's apologia for its latest corporate governance outrage. The Facebook founder is maintaining his iron grip on his company, too. But being public is not the same as being private. It comes with responsibilities. Silicon Valley's billionaires are getting the benefit of a liquid share currency to build the business, and a very, very lucrative exit over time. The rest of us, we just have to hold our noses and hope they live up to their very high estimations of themselves.
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