This blog post is in response to an article in the Wall Street Journal on September 6, 2017, by law professor Dorothy Shapiro Lund titled “The Case for Nonvoting Stock”. Here is a link to a pdf of the article:
As background, almost all stock is democratic. All shareholders vote. If you don’t like the way a company is managed, then convince enough shareholders to vote No to corporate actions, and replace the Board of Directors and management. Or, launch a takeover bid (usually at a higher stock price) and convince other shareholders to sell their stock to you.
It has only been in recent years that companies have gone public using nonvoting stock. The most recent, prominent example is Snap, which I wrote about in my August 15 blog post. I called it a bad deal and a teachable moment.
Professor Lund’s concern is that the various Indexes will bar companies with nonvoting stock. She thinks barring such companies is a mistake. She also says that having two classes of stock leaves corporate decisions to those who are informed, which she views as a positive. I have two reactions to this article and Professor Lund’s opinion.
My first reaction is that having two classes of stock may be a good thing or it may not be a good thing. The jury is out. And who will be the jury to decide? The market, of course. If the nonvoting stock is a good thing, the market will warm up to it and investors will buy the nonvoting stock, thus driving its price up. Other companies that are considering going public will notice, and they will consider issuing nonvoting stock as well. It will become a more common and accepted practice. If the nonvoting stock is not a good thing, investors will sell it (or not buy it in the first place) and other companies won’t use the same strategy. As to whether the Index arbiters (Standard & Poor’s and the like) should allow companies with nonvoting stock, that’s up to them, but the marketplace will determine if it will be a phenomenon going forward.
My second reaction is, what if our federal government operated like this? Individuals don’t get a vote, and the country is better run by an enlightened elite? This would be Progressive Nirvana! Disdain for the common, uneducated voter. Actually, our Republic system is sort-of organized like this. Our elected Representatives and Senators vote on laws because they are fully-devoted to said endeavor and are more informed about what the laws say and do. However, there is one big difference: We citizens elect our Reps and Sens. They work for us, and we can vote them out if we (collectively) don’t like what they are doing.
In the case of nonvoting stock, company management is not accountable to the shareholders. They are only accountable to themselves, and perhaps the Board of Directors. Management may not be solely motivated to enhance the value of shareholders; nor might they be motivated by the interests of other stakeholders such as the company employees. Management would be self-interested and self-sustaining. I guess a hostile bid could happen, but the hostile would have to convince an entrenched interest.
I am not picking on Professor Lund here. Her article may have validity as it relates to the Indexes. All I am saying is that, as they are currently structured, I am not a fan or a proponent of nonvoting stock deals such as Snap. Snap stock is in the tank, and unless changes ensue, I think it will remain in the tank, and other companies will not follow the same playbook.