Source: Fortune
Summary
The recent IPO of SpaceX has reignited the debate over dual-class shares, with some arguing that they hurt shareholders. However, successful business builders like Michael Dell, Warren Buffett, and Sergey Brin and Larry Page have used dual-class shares to maintain control of their companies. Critics argue that dual-class shares lead to a “wedge” between a controller’s voting control and economic ownership, but this criticism is based on a misinterpretation of agency theory. In reality, dual-class shares can be beneficial when used by highly engaged controllers with a proven track record of success. The optimal share structure is situational and depends on a company’s maturity, competitive environment, and leadership caliber.
Our Reading
The numbers tell one story. While some critics argue that dual-class shares are inherently bad, the data shows that companies with dual-class shares can outperform their peers. However, this is not a one-size-fits-all solution, and the success of dual-class shares depends on the characteristics of the company and its leadership. The blueprint for successful dual-class companies includes highly engaged controllers, a proven track record of efficient capital allocation, and a long-term orientation. On the other hand, warning signs of dual-class underperformers include the twilight entrenchment, corporate piggy bank, unearned entitlement, destructive infighting, and hubris of ‘diworsification’. Ultimately, the art of leadership cannot be reduced to rigid mathematical formulas, and judgment is vital in evaluating the success of dual-class companies.
One sentence that reframes the situation: The debate over dual-class shares is not about good governance, but about the art of leadership.
Author: Evan Null
