(enough footnotes to make Matt Levine envious)
From Columbia Law School's Blue Sky Blog:
My first few weeks at the Securities and Exchange Commission have been a whirlwind—and just to be clear, I am not talking about the markets.[1] In a few short weeks, I have gotten a crash course on SEC policymaking—and enough reading to empathize with my former law students, who used to tell me, to my puzzlement, that my Corporate Law syllabus was not exactly beach material.
But in between the policy memos that come across my desk, I’ve also had the pleasure of working with my new colleagues on the SEC’s Staff. They’ve taught me a lot in a short time, and I’m grateful for their insights and assistance. The hard work and dedication of these folks gives me confidence that we are up to the challenge of making sure our financial markets are the safest, strongest, and most efficient in the world.
So the first few months of 2018 have been quite a blur. Fortunately, they have not been as stressful for me as the last few months of 2017.
You see, last fall, I took part in two of the most nerve-wracking Q&A sessions of my life. In late October, I had the ultimate job interview: a two-hour, televised confirmation hearing in front of the Senate Banking Committee.[2] Then, two months later, I found myself the one posing the life-changing questions. I asked my girlfriend Bryana to marry me.
I’m happy to report that, to my surprise, both Bryana and the Senate offered a resounding yes—literally within 24 hours of each other. But, let me just say, I now have newfound respect for the staff and Senators on the Committee. I only had to ask one question, and it nearly gave me a heart attack.
Now, as a newly engaged guy, I fully embrace the notion that a strong marriage must be built on a foundation of eternal trust. But today, I would like to ask whether it is wise to apply that standard to corporate governance. Should our public investors have to place eternal trust in corporate insiders? That is, should so-called perpetual dual-class stock ownership structures, which grant corporate executives control of our public companies literally forever, be acceptable?
Before I get started, let me just note that the views I express here are my own and do not reflect the views of the Commission. (Although, I’ll confess, I hope someday that they do.)
The Law and Legacy of Dual-Class Stock
As you know, “dual class” voting typically involves capitalization structures that contain two or more classes of shares—one of which has significantly more voting power than the other. That’s distinct from the more common single-class structure, which gives shareholders equal equity and voting power. In a dual-class structure, public shareholders receive shares with one vote per share, while insiders receive shares that empower them with multiple votes. And some firms have recently issued shares that give ordinary public investors no vote at all.[3]
For most of the modern history of American equity markets, the New York Stock Exchange did not list companies with dual-class voting. That’s because the Exchange’s commitment to corporate democracy and accountability dates back to before the Great Depression.[4] But in the midst of the takeover battles of the 1980s, corporate insiders “who saw their firms as being vulnerable to takeovers began lobbying [the exchanges] to liberalize their rules on shareholder voting rights.”[5] Facing pressure from corporate management and fellow exchanges, the NYSE reversed course, and today permits firms to go public with structures that were once prohibited.[6]
As you all know well, more and more companies choose today to go public with dual-class. Public companies using dual-class are today worth more than $5 trillion, and more than 14% of the 133 companies that listed on U.S. exchanges in 2015 have dual-class voting.[7] That compares with 12% of firms that listed on U.S. exchanges in 2014, and just 1% in 2005. [8]
There’s a long-running debate on dual-class. On one hand, you have visionary founders who want to retain control while gaining access to our public markets. On the other, you have a structure that undermines accountability: management can outvote ordinary investors on virtually anything.
There is reason to think that, at least for a defined period of time early in a company’s life, dual-class can be beneficial. The structure can allow entrepreneurs to build for the long term—and even transform entire industries—without being subject to short-term pressure.[9] When many managers are at the mercy of daily stock-market pressure, dual-class can help America’s most innovative companies create the sustainable long-term value we need to grow our economy.[10]
Many have argued forcefully, however, that one-share, one-vote should be the rule for all public corporations.[11] Whatever the benefits may be of permitting dual-class in a few well-known cases, these advocates argue, the costs for investors—who are left with no way to hold management’s feet to the fire while dual-class is in place—outweigh those benefits....MORE
