When Snap (SNAP) - Get Snap, Inc. Class A Report made its highly anticipated public debut in March, the parent company of disappearing message app Snapchat raised eyebrows with its decision to issue shares with absolutely no voting rights.
On Monday, panelists at TheDeal's (TST) - Get TheStreet, Inc. Report Corporate Governance 2017 conference in New York debated the merits of the upstart social media company's non-voting share structure, seeming to conclude that there's no clear answer to whether it's ultimately a good or bad development.
The $3 billion offering quickly drew scrutiny from institutional investors and hedge fund managers alike who argued that the voting structure would leave Snap's management unaccountable to shareholders. Meanwhile, defenders of this increasingly common share structure believe that investors who bought into the IPO and subsequently know full well what they're getting into.
And while Snap has attracted its fair share of scrutiny for the move, it's not the first tech giant to issue shares that carry no voting rights. Alphabet (GOOGL) - Get Alphabet Inc. Class A Report -- then known as Google -- went public in 2004 with a separate class of non-voting shares, and Facebook (FB) - Get Facebook, Inc. Class A Report introduced such shares in 2016. Panelist Ken Bertsch, who is an executive director of the Council of Institutional Investors, said during Monday's panel that the controversial practice actually has a history dating back to the 1920s, but that Google is widely seen as setting the framework for Silicon Valley companies.
"Snap went further than anybody since the twenties and so that has implications," Bertsch noted. "Google...managed to get the practice more or less accepted in the market."
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According to Charles Elson, a panelist and professor at the University of Delaware who follows corporate governance, investors with no voting rights are usually buying into a CEO's vision for the company. But ultimately, Elson argued, that doesn't erase the fact that non-voting share structures are built on a lack of corporate governance.
"The rationale behind the [structure] is pretty simple, that 'I'm a genius and leave me alone to let me be a genius,'" Elson said. "But I think even geniuses have to be accountable to everybody."
"What's so bad about having to report to shareholders every year? Politicians do it all the time," Elson continued.
Another panelist, Marc Trevino, who is a partner at Sullivan & Cromwell LLP, said that shareholders aren't ultimately the force that exerts control on a company's management team -- instead that comes from the market. The share price serves as a disciplining measure for board members and executives, he argued. "We have well-developed controls beyond just board oversight," Trevino said.
There's also an easy remedy for non-voting shareholders who want to send a message to upper-level executives and directors, Trevino said.
"If you don't like dual class stock, just sell it," Trevino explained. "That's one way to vote."
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