The initial public offering of Snap (SNAP) , the developer of the popular disappearing-photograph app Snapchat, captured the imagination of the markets, raising more than all U.S. tech IPOs put together in 2016 as investors bet on its growth prospects.
However, big institutional investors and hedge fund managers in the United States and abroad viewed its foray into the public investment sphere in an entirely different light -- with horror and dismay. In their opinion, Snap's unprecedented issuance of non-voting shares in its IPO ensured that the tech darling would be permanently unaccountable to shareholders.
What is worse, big investors and governance experts contend, is that the offering also underlines a turn away from corporate governance best practices that is gathering momentum.
A key worry among governance experts and institutional investors is that Snap's success will unleash a wave of copycat IPOs, following in its non-voting footsteps. Will Uber or Airbnb be next?
Already the institutional investor class has been at its wits' end when it comes to many of the biggest tech IPOs over the past few years, including Facebook (FB) , LinkedIn -- now owned by Microsoft (MSFT) -- and Zynga (ZNGA) , which were structured at the outset with dual or multi-class voting systems, giving insiders control of the majority of the votes. Big index funds, exchange-traded funds, and public pension funds have been forced to buy shares in these and other companies with diminished voting power because they invest passively following major indices, such as the Russell 3000.
On the international front, good corporate governance practices are being thrown to the curb as IPO markets viciously compete for listings. Singapore has brought the issue front and center as its regulatory regime -- seeking to steal issuances away from other jurisdictions - is moving to allow for super-majority voting by insiders. Hong Kong's stock exchange regulators are evaluating whether to revisit their governance rules after losing out on one of the biggest IPOs in 2014, Jack Ma's Alibaba listing, over a policy of giving shareholders a vote for every share. Where did that listing go? Seeking to attract IPOs, the New York Stock Exchange accommodated Alibaba's demand that the e-commerce and media company's founders control a majority of the board.
"We need to see this in the context of global competition between stock exchanges," said Council of Institutional Investors director Ken Bertsch. "It is clear that Singapore and Hong Kong are responding to competitive pressures, to what I would describe as low standards at the Nasdaq and NYSE."
All the listing arbitrage among stock exchanges, in the United States and abroad, has some concerned that the phenomenon could have systemic implications on a global scale. Consider that the spike in IPOs giving founders control is coinciding with an ever-growing passive shareholder class that could soon represent a majority of investors in the public markets.
Proponents of the tactic argue that it is necessary and justified to encourage IPOs at a time when the IPO market in the U.S. has been struggling. At the same time, they contend that it repels a growing class of activist hedge fund managers targeting companies for M&A and other share-price improving moves. But a key concern among governance experts is that global markets could see a rise in major corporations that aren't accountable to shareholders, eroding a pillar of the contemporary market-based system for tempering risk in the financial system.
While some of the new class of so-called "visionary founder" controlled companies are doing well, others -- such as Zynga, Groupon (GRPN) , and GoPro (GPRO) -- aren't. Even Mark Zuckerberg at some point won't be the right person to run Facebook, as ValueAct Capital's Jeff Ubben noted recently. The result may be that a large segment of assets will soon be controlled by individuals who no longer are visionary founders. Lacking voting rights and faced with inertia in the form of insider-controlled boards, shareholders won't be able to drive companies to implement difficult C-Suite changes at times when they may be most needed.
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