Google’s evil stock split

By Felix Salmon
April 13, 2012
Robert Cyran: there's something a little evil about the way that Google is splitting its stock, and in so doing creating a whole new class of non-voting shares.

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Count me in with Robert Cyran: there’s something a little evil about the way that Google is splitting its stock, and in so doing creating a whole new class of non-voting shares.

There’s a long history of such things: they were outlawed in the 1920s, when they were commonly used by unscrupulous managers. The New York World even wrote a poem on the subject:

Then you who drive the fractious nail,
And you who lay the heavy rail,
And all who bear the dinner pail
And daily punch the clock—
Shall it be said your hearts are stone?
They are your brethren and they groan!
Oh, drop a tear for those who own Nonvoting corporate stock.

Dual-class voting shares were illegal for most of the 20th Century, but came back in 1986. James Sterngold’s NYT story on their reintroduction is well worth a read, featuring as it does comments against the new rules from both Felix Rohatyn (”The one-share, one-vote rule is pretty fundamental to the market”) and T Boone Pickens (”Let’s face it, managements want this because they want to entrench themselves. They went to Congress to get protection and they didn’t get it. So they went to the exchange to get protection, and they got it.”)

Even then, however, there were safeguards, including the crucial one that a majority of independent shareholders — excluding management and some directors — had to approve the move. The basic idea was explained ten years later:

The defining principle of current American corporate law seems to be, if the existing shareholders agree to the creation of a new type of shares with no voting rights, why should we object?

Google has, now, clearly violated the spirit of the NYSE rules, if not their letter. It took 15 months for the independent directors on the board to be persuaded of this, in long and secret deliberations:

In January 2011, the board established a special committee, comprised of independent, non-management board members to consider a new class of stock, or other alternatives. This committee retained its own financial and legal advisers to assist with its deliberations, and met on numerous occasions over the 15 months that the special committee considered the proposal separately from the board. The committee recommended, and the board unanimously approved, today’s proposal.

The proposal is subject to the approval of a majority of the voting power of Google’s common stock, voting together as a single class, at our annual meeting on June 21, 2012. Given that Larry, Sergey, and Eric control the majority of voting power and support this proposal, we expect it to pass.

My key problem with the proposal is that it’s being pushed through without common shareholders being given the opportunity to object. I would be OK with it if it was being voted on a one-share, one-vote basis. But instead, Google’s Troika has decided that having ten times the votes of any other shareholder isn’t good enough for them, and that what they really want is a whole new class of shareholders — including new employees — who have no votes in the company at all.

Given the way that this is being done, I’m with Cyran that we can place no store whatsoever in the “stapling” provision which says that as the Troika sells their stock, they will be forced to sell down their super-voting stock commensurately. Such provisions tend to last until they’re needed, at which point the controlling shareholders simply use their control to get rid of them.

Non-voting shares are rare things, and Google’s news comes not long after Telus decided to move the other way, giving votes to all the holders of its non-voting stock. There’s no need for this to happen now — or ever, for that matter — and the letter from Larry and Sergei is pretty unconvincing on the subject of why they’re doing it.

We have a structure that prevents outside parties from taking over or unduly influencing our management decisions. However, day-to-day dilution from routine equity-based employee compensation and other possible dilution, such as stock-based acquisitions, will likely undermine this dual-class structure and our aspirations for Google over the very long term. We have put our hearts into Google and hope to do so for many more years to come. So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world.

It’s worth putting this theoretical fear in perspective. Common shareholders currently have just 32.6% of the voting stock at Google, with Larry and Sergei Sergey between them controlling 57.7%. If Google doubled the number of common shares outstanding, the Troika still wouldn’t lose control. And in any case, as Steve Jobs has shown, you don’t need control of the stock to have complete control of the company.

This move, then, is basically a way for Google to try to retreat back into its pre-IPO shell as much as possible. It never really wanted to go public in the first place — it was forced into that by the 500-shareholder rule — but at this point, Google is far too entrenched in the corporate landscape to be able to turn back the clock. It’s too big, and too important, and has been public for too long. That’s the thing about going public: it might suck, but once you’ve done it, you’ve done it. And at that point, if you try to pull a stunt like this, you risk looking all too much like Rupert Murdoch.

That said, however, I can’t say I’m wholly surprised by this development. Google hasn’t always been evil, but it has been evil since January: this news just confirms what many of us suspected when they closed down the Kaffee Klatsch in Davos. Which just goes to prove, I suppose, that the World Economic Forum really does give you advance notification of important corporate developments.

Comments
25 comments so far

Chaebol-style management is something else (besides university-loving mass killers) that seems to have been imported from Korea. Still, nobody has to buy the stock.

Who cares?

Posted by MrRFox | Report as abusive

Maybe, if Google had supplied their driverless vehicles to chauffeur Davos attendees to other cafes back and forth, they would have redeemed themselves?

Felix, this is the Larry and Sergey (and Eric) Show.

Act I: Annual double-digit gross profit increases since its IPO, a mobile operating system that has grabbed over 50% market share in the US and the world. The first credible threat to Microsoft — the 500# gorilla from the previous two decades. By at least one measure, their Chrome browser is the most popular browser (geek visitors to the W3C site), and #2 globally according to StatCounter. Their browser continues to trounce Bing. Clouds on the horizon, from companies unable to compete head-to-head, filing complaints with the FTC and DOJ…and Scott Cleland.

Intermission I: A 34 percentage point advantage over Apple in the under-30 crowd, who view Google very favorably. Potential stock split that consolidates voting power and control of the company.

The last thing Google needs, is a bunch of outsider business people (Bain Capital, for example) insisting they know better, how to run Google. And if those people don’t like what Larry, Sergey and Eric have done with Google, they can always sell their shares and buy Microsoft and Nokia.

Posted by GRRR | Report as abusive

I thought it was generally agreed that one of the greatest evils of the past century has been the propensity of big businesses to do evil — to use Google’s word — with the excuse that “our first duty is to the shareholders”. Google has won admiration largely because by not always chasing that bottom line in such a shortsighted way.

This behaviour is entirely consistent with the founders wanting to guarantee that they will never lose control to investors who will take the company away and ruin it.

How can you mention Jobs with a straight face when he was first ousted, then only brought back in when the company was on the brink of ruin?

Posted by BahHumbug | Report as abusive

Sloppy, Felix. You say having classes of stocks with different voting rights was “illegal,” but cite only a rule change at the NYSE. The Washington Post has had a second, not publicly traded super-voting class of stock (“A” shares) held by the Graham family since it went public (with “B” shares) in 1971. The B shares were listed on the AMEX until the NYSE changed its rules.

Posted by VoxR | Report as abusive

Page basically said if you don’t like this, sell your shares. He said they’re doing this because they (he and Brin) want to run the company as they see fit, which is great. Founders rarely start companies with the goal of maximizing short term profits, but once a company goes public, “investors” take over, and they transform the company’s goals from making a better product into making more money (ignoring the fact that a better product is usually the best way to make more money). This will keep that from happening while they are running the company.

I think the intent of the rules that you think Google is trying to subvert is to prevent management from running the company to enrich themselves (which is how most publicly traded companies are managed). I hardly think that’s the motivation for Page and Brin, but if you don’t agree, go ahead and sell your stock. And use Bing.

Posted by KenG_CA | Report as abusive

“Evil”, “Troika” – You sound like George Bush. Maybe Google has nuclear weapons and we could authorize a Congressional Act of War to crush the fascist Google regime.

Posted by moxsee | Report as abusive

Historical question: Ford has a dual-class structure, which allows members of the Ford family to retain effective control. It’s that precedent which comes to my mind when I hear about this Google move, or Zuck’s dual-class arrangement which leaves him in total control of Facebook. But the Ford family arrangement is far older, and they’ve had it for the entire period that stock was publicly traded, including the years where dual-class structures were, well… deprecated by regulators. So, I’m curious how the Fords sustained it. Were they grandfathered, did they work some technicality, or what?

Posted by rsthau | Report as abusive

Perhaps Google is just doing the opposite of what the Financieratti said should be done.
Google has been the Larry & Sergey Co. since they went public. Anyone who is uncomfortable with that should sell their shares.

Posted by k9quaint | Report as abusive

Where’s Danny Black?

Hey, Danny – Wall Street money-changers like GS et.al. can run Google better than muppets like Brin and Page, can’t they? What could a couple of clowns like them do better than the Wise Guys on the Street – nobody’s better than they are – or more ethical, right, buddy?

Posted by MrRFox | Report as abusive

FifthDecade, you gotta give respect to MrFox for that comment.

Posted by KenG_CA | Report as abusive

Denying Davos attendees great coffee sounds pretty righteous to me. It’s too bad for the locals caught in the crossfire, but their lives are presumably made hellish by the conference already.

I don’t like the split, and I think the “but we told you” excuse is tired, but I still respect the guys for telling people to not buy the stock if they don’t like the voting scheme.

Posted by AngryInCali | Report as abusive

I’m not thrilled with this plan, simply because I don’t want to track two different Google holdings and worry about the price spread between the two, but it is meaningless for control purposes and so says more about L+S+E’s paranoia about losing control. If they do this split, the balance of votes between public-insiders doesn’t change by 1 vote on the next day. Everyone gets a class C share. Pretend it’s a debt without priority if you want. Everyone still has the same Class A and Class B votes they had before the split. No entitlement is taken away from anyone. If insiders sell their C shares but keep their votes, well, do you really think they couldn’t have found a way to do that without a new share class (forward sales, non-recourse debt secured by shares, etc.)?

I guess you can argue that future use of Class C shares for deals is evil, except that Google is going to be entering these deals at arm’s length. So if they buy out some company that makes lame photo-editing software to replicate the effect of using an obsolete $50 camera from the ’70s on your smartphone and those guys are willing to take non-voting stock…who cares? If someone applies to work at Google and gets told “Hey, we only want to give you economic exposure, without the meaningless votes on corporate acts, which by the way is an area where we have always done whatever made sense to us and our company is less than 15 years old and worth like $200b so we think we’re doing ok” and still wants to work there…who cares?

Posted by najdorf | Report as abusive

This is a heinous idea. It’s bad but understandable when a company issues new shares this way, but to dilute existing owners voting rights is sinister. That the board of directors who is there to protect the existing stock holders signed on to this is far worse and a very good reason to dump the stock. The SEC appears silent on this. And some guy on CNBC touted as the #1 Google analyst down-played the significance.

Posted by Sechel | Report as abusive

Follow up comment @ Felix
Thinking back at those companies that offer dual voting shares. How many of them have out-performed the market? Seems to me these are managers who do not want to be accountable. NY Times and Dow Jones comes to mind.

Posted by Sechel | Report as abusive

I agree with GRRR on this one. This is a preemptive move to thwart future Carl Icahns, the 72-year-old corporate raider turned hedge-fund manager and shareholder activist, who started terrorizing Yahoo’s management in 2008. Good for Larry, Sergey and Eric for getting this out of the way now.

Posted by Strych09 | Report as abusive

Politicians tried previously eliminate 500-rule to 2000-rule excluding employee options to accommodate Facebook not go public…

Interesting read below..

http://finance.fortune.cnn.com/2011/11/0 8/ending-the-500-shareholder-rule/

- A jay

Posted by ahjay | Report as abusive

Sechel, this doesn’t dilute existing voting rights. The number of voting shares and the voting power they have is not changed at all by this plan.

Posted by pkasting | Report as abusive

This is a good story Felix and I think management’s intention to entrench themselves is accurate. However if you consider what may be in Google’s long term plan (20yrs), they must intend to become a *mammoth* company. There will be big acquisitions and mergers (acquiring faltering telcos and media companies and photo sharing apps) and dilution of control must be a genuine long term risk to the management team. It seems appropriate to create a non-voting share class and try to push those deals into that class when they can.

Posted by JeromyEvans | Report as abusive

Entrenched management is not a good idea IMO, but that doesn’t necessarily mean it’s always wrong or unjust.

These 3 guys created this company from nothing. The 500-shareholder rule forces them to go public, and then other rules serve to compel them to surrender control to people of the ilk Danny Black has a “thing” for – the same people who coined the term “muppet”.

Avoiding that through legal means isn’t something inherently wrong, in my twisted (as per 5thDecade’s assessment) view of justice.

Posted by MrRFox | Report as abusive

I can’t understand the arguments here. Google is going to issue one share of X for each share of GOOG. If the market thinks that X is evil or worthless, it can split the value between X and GOOG as 40::60, or 25::75 or 0::100. How is this evil?

Posted by t_parker16 | Report as abusive

Sounds like they’re doing this to enable future deals and incentives with non-voting stock. Existing shareholders aren’t diluted. Larry and Sergey and Eric agreed they wouldn’t sell non-voting shares ahead of voting shares (although it will be interesting to see how ironclad that is, if they can use swaps, change the deal down the road etc.). You can’t even say the future recipients of those shares are getting screwed, since they will be entering into any deal willingly and knowing the price of the non-voting shares.

Really, the only argument is that entrenched control with multiple classes/big voting disparities is just a bad idea.

Posted by Curmudgeonly | Report as abusive

As a small investor, its pretty obvious to me that my votes have a minimal effect. I know that the smart thing for me to do is to vote with my money, i.e. buy stocks of companies where I believe in the management. The only people whose votes matter are the big Wall Street banks and hedge funds, who are focused on short term results rather than the growth of the company. This kind of short term focus is part of the reason that Yahoo! is doing so poorly. For once I would like their board to talk about making better products rather than “increasing shareholder value”. I’m sure that Larry and Sergey saw what happened to Yahoo! and decided not to go down that road.

Posted by Fred32 | Report as abusive

‘Do no evil’ has become ‘DO KNOW EVIL’.

Posted by NoPCZone | Report as abusive

For a great read on GOOG and to understand it properly, visit, vippennys tocksite . com

Posted by Cage3432 | Report as abusive
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