March 27, 2018
Dual-class popularity brings a new set of reputational challenges
Dual-class companies have been around for many years in North America and Europe, but the winds of change are blowing as previously staunch opponents in Asia such as Singapore and Hong Kong move to allow these structures. According to markets data provider Dealogic, in 2016 dual-class IPOs raised more than twice as much capital as the year before. The growing popularity of this type of listing is having a material impact on the way that companies need to engage and build support for this structure, not only with investors but also the wider public.
The growth of big technology has been a game changer for global markets. When companies such as Alphabet (formerly Google), LinkedIn, Facebook, and Alibaba chose to go public, they picked the New York Stock Exchange because, at the time, it was one of the true global exchanges that offered dual-class share structures. The prospect of attracting listings from the world’s most innovative and fastest growing technology companies has led exchanges around the world to sit up and take notice and ensure that they do not miss out on the ‘next Facebook or Alibaba’. With Hong Kong and Singapore having made the switch and even London looking into dual-class options, the tide is turning: dual-class share offerings are becoming the new normal for high-growth companies.
The rationale for the founders of the tech giants is clear: dual-class structures allow them to retain control of their business without feeling inhibited by short-term performance pressures. When such companies list, their stock is split into different categories to give owners of one class greater voting rights than owners of the other. We are even starting to see three-class share offerings, as in the case of Dropbox’s upcoming IPO, which will include a third class of shares with zero voting rights.
Ironically, as Asian exchanges allow dual-class shares, opposition is mounting in the U.S. Some of the biggest investors in the world have warned that the changes will undermine corporate governance and harm most shareholders. Snap’s IPO on the NYSE in March 2017 caused a stir when it only offered non-voting shares to investors. The company’s decision received considerable media attention, with many branding it ‘’a corporate governance nightmare.” Last year the FTSE Russell and S&P began barring companies from joining their benchmark indexes unless more than 5% of the voting rights are in the hands of public shareholders.
The debate against dual-class structures has hinged on two issues: whether a company can still promote good corporate governance and whether these structures are detrimental in the long-run for value creation. Media interest has been a key driver in bringing the debate to the forefront, with investors and other third parties frequently being asked for their views on a company’s share structure. The weight of these concerns can escalate quickly through social media.
Against this backdrop, how do companies defend dual-class or multi-class structures? Ultimately, they need to recognise that this is less about whether dual-class structures are desirable as a concept and more about whether this is the right structure in practice for them, their shareholders and the wider public.
Effectively a dual-class structure asks shareholders to buy into the founders and their vision. The management team’s voice needs to come through loud and clear, explaining the rationale behind the decisions that they make and how these are in the best interests of the company over the long-term. When the founders´ vision is value-creating, it can be in everybody´s interest to let them manage the corporation.
In the case of Facebook and Alibaba, their founders have retained control over two of the world’s most valuable companies. With less than one percent of the social media giant’s publicly-traded stock and 60 percent of its voting power, Mark Zuckerberg was able to drive through Facebook’s acquisition of WhatsApp for $22 billion with little shareholder input. While many questioned the rationale of paying so much for a business that was only generating $10m of revenue at the time, Zuckerberg played a communications masterstroke – explaining the rationale for the acquisition through a heartfelt post on his Facebook page. It was a decision that paid off, helping the wider public buy into his vision and strengthening Facebook’s reputation as an integrated ‘technology lifestyle’ company.
Navigating through the new normal
In this new environment, where reputations can be won and lost in a heartbeat, companies employing dual-class share structures need to do three things:
First, listen. Regular engagement with investors is even more important here than in a traditional share structure due to the reduction or lack of voting rights. Companies need to pay special attention to public opinion and media criticism to ensure they understand and respond quickly to concerns from those who matter.
Second, explain. Good corporate governance practices combined with regular engagement with the media, analysts and investors are key to reassuring the public that companies are not pursuing private interests at the expense of outside shareholders.
Third, demonstrate. Companies need to be consistent in showing that the dual-class share structure is delivering results. This message should be at the heart of any corporate communications collateral or campaign.
This article was adapted from a piece originally published in IR Magazine.