The House Judiciary Committee announced yesterday that it was opening an antitrust investigation into “tech giants” including Google. Chairman Jerry Nadler said:
[T]here is growing evidence that a handful of gatekeepers have come to capture control over key arteries of online commerce, content, and communications…Given the growing tide of concentration and consolidation across our economy, it is vital that we investigate the current state of competition in digital markets and the health of the antitrust laws.
We’re going to look at five issues Chairman Nadler should consider that relate both to Google and to some others, too. Let’s start with reforming corporate governance and bring eyesight to the willfully blind.
1. One Share, One Vote, Not Ten: Anyone in the music business has had just about enough of government oversight, so I don’t recommend it as a solution in general. But–in the absence of marketplace transparency, the government is about the only place to go to bring reforms to well-heeled corporations. So rather than ask the government to fix specific problems on an ad hoc basis, the government would do well to ask what causes the market to fail as it clearly has with Google.
The first question to ask is where was the board? In Google’s case, the core problem is both easy to find and easy to fix. It lies in the voting structure of the shareholders. Shareholder rights and corporate charters are state law matters and don’t relate to the federal government, but–the federal government does have a say about who gets to sell shares to the public and has an interest in protecting the shareholders of publicly traded corporations. It is this nexus that gives the House Judiciary Committee clear oversight authority over the corporate structure of publicly traded corporations.
While anti-coup d’etat provisions might make sense for private companies whose investors are sophisticated financiers, or newspapers seeking to retain editorial independence, once that company is publicly traded a bald discrepancy that simply mandates voting power to the insiders forever seems like it has to go. And as we have seen with Google, the lack of corporate oversight has resulted in unbelievable arrogance and a complete failure of corporate responsibility. And worse yet, because Google got away with it, lots of other tech companies follow essentially the same model (including Facebook, Spotify and Linkedin).
It must also be said that stock buybacks approved by a board where insiders who benefit from the buyback have supervoting shares and control the board is a practice that reeks to high heaven. Buybacks and dual class supervoting shares have been widely criticized including by Securities and Exchange Commission Commissioner Robert Jackson who is also a critic of supervoting shares.
So how did this happen to Google? The supervoting structure started when Google was a private company as a way for the founders to preserve control and avoid venture capital investors pushing them around. OK, fine, I understand that.
Oops. What happened to Class B? Ay, there’s the rub.
Class B shares are not publicly traded and are held by insiders only. But as you will see, they control every aspect of the company. So why would Google’s insiders want this share structure? There’s actually a simple answer. Class A shares (GOOGL) get one vote per share, Class B shares get 10 votes per share and Class C shares (GOOG) get no votes.
That’s right–Class B shares cannot be purchased and their holders get 10 times the voting power of the Class A holders, often called “supervoting” shares, because their super power is…well…voting.
The Class C shares were created as part of a 1:1 stock split that doubled the number of shares, halted the price per share, but resulted in no change of the voting power of the Class A and C shareholders.
When the dust settled, the Google/Alphabet voting capitalization table looked something like this:
Class A: 298 million shares and 298 million votes, or roughly 40% of the voting power with votes counting 1:1.
Class B: 47 million shares and 470 million votes, or roughly 60% of the voting power with votes counting 10:1.
What this also means is that the holders of Class B shares voting as a bloc will never–and I mean never–be outvoted at a shareholder meeting, their board of directors will never be challenged much less replaced and shareholder meetings are a sham.
Who controls the Class B shares? The people that Commissioner Jackson might call the “corporate royalty“:
Larry Page: 20 million shares (as of 2017)
Sergey Brin: 35,300 Class B shares plus 35,300 Class A shares (as of 2018)
Eric Schmidt: 1.19 million Class B shares, 40,934 Class A shares, and 10,983 Class A Google shares, plus 2.91 million Class B shares through family trusts.
Sundar Pichai: 6,317 Class A shares and no Class B shares.
The House Judiciary Committee has a chance to correct the supervoting system as bad policy and implement a long-term fix across the board for all dual-class companies that want to trade on the public exchanges.