Investors want change, but founders like Mark Zuckerberg are holding them back

As some of the country’s largest and most influential companies face pressure to make change amid the growing trend towards socially responsible investing, there is little that their shareholders can do. Companies like Facebook FB,
-2.24%,
Walmart WMT,
-0.21%
and Lyft LYFT,
-0.40%
– where insiders or family members like the Waltons of Walmart have majority or near majority control – can ignore shareholder proposals and demands on everything from more transparency on political contributions to fairness audits racial. In these companies, most shareholders’ resolutions are doomed to failure.

“At Facebook, the annual general meeting is a lot of theater,” said Robert Bartlett, a law professor at UC Berkeley who teaches securities regulation and corporate finance. Which proposal has obtained the most external votes this year? The one asking Facebook to get rid of its two-class share structure, which only got 27.7% of the overall votes but 90% of the outside votes.

Frustrated institutional investors and shareholder advocacy groups say all they can do is keep trying to push companies in any way they can – and that it will take internal and external pressure to push for change .

“There’s an arrogance about it that just calls for some sort of justice,” said Michael Connor, executive director of Open MIC (Media and Information Companies Initiative), a nonprofit that works on socially investing. responsible. Socially responsible investing – also known as environmental, social and governance (ESG) – has become more popular in recent years, and this is especially the case among young investors. Polls show they care more about investing in companies whose values ​​match theirs than their older counterparts.

Connor added, “Once you’ve sold the business to the public, it’s the business to the public.”

See: ESG investment now represents a third of total US assets under management

Also: as baby boomers hand over the keys to the stock market, young sustainability-conscious investors let their conscience run free

The problem is compounded by the fact that dual-class IPOs have done better than single-class IPOs recently, according to data from a professor who tracks IPOs.

Jay Ritter, a finance professor at the University of Florida who collected the data, has an explanation for this: “A greater portion of dual-class IPOs have been tech stocks, and tech stocks have outperformed by. other sectors.

So while some investors may show their dissatisfaction by disengaging from certain companies, “the fact that dual-class IPOs have gone well, on average, has led investors to be relatively complacent,” Ritter said.

Before the crop of companies that went public over the past two decades and adopted multi-class equity structures, such structures were “quite rare,” Bartlett said. “You saw it in media companies because you wanted editorial independence and didn’t want it to be compromised.”

An increase in corporate buyouts in the 1980s was a game-changer, with two-class equity structures becoming more popular as a way of trying to fend off them. Then Google went public in 2004 with shares with unequal voting rights (Class A shares were worth one vote each while Class B shares were worth 10 votes each), and other tech companies followed suit. , like Facebook. And in 2017, Snap Inc. SNAP,
+ 3.15%
went public and gave common shareholders no voting rights. Other well-known companies with multi-class stocks have since debuted on the public stock markets including Lyft, Pinterest Inc. PINS,
+1.03%,
DoorDash Inc. DASH,
+ 0.64%
and Airbnb Inc. ABNB,
-0.93%.

In depth: the instant backlash won’t stop founders-friendly stock structures

According to Ritter’s research, in 1980 1.4% of initial public offerings were made by companies that had dual-class shares. In 2004, when Google went public, that number was 7.5% and has since been mostly double digits. Last year, 20% of all IPOs and 43.2% of tech IPOs were dual-share companies. This year, until the end of July, dual-class companies accounted for 28.9% of all IPOs and 45.8% of technology IPOs.

In the case of Facebook, the social media giant has come under fire for a variety of issues for several years as its power and reach increased. But it continues to post increasing revenue and earnings, and its stock has outperformed the S&P 500 and the rest of the tech industry for the past five years, according to FactSet.

Which could help hold companies accountable, according to Bartlett: if the Securities and Exchange Commission tied listing requirements to dual-class structures with sunset provisions. And he said the index providers “have been very aggressive in pushing for a share vote.” For example, in 2017, Standard & Poor’s and FTSE Russell announced that they would no longer include companies with multi-class share structures in their indices, although some of those companies would stay because they had rights. acquired.

Since the start of the year, 7% of companies in the S&P 500 index had unequal voting rights, while in the Russell 3000 this number was 9.4%, and in the IT sector GICS 45 it was 10.2%, according to ISS Corporate Solutions.

“The public is very concerned about the decision-making by companies like Facebook, their influence and their power,” said Richard Clayton, research director at CtW Investment Group. “If there was a one-share-vote structure in place when Facebook went public, then the company would have made some big changes already.”

The other shareholder proposals that obtained the majority of external votes on Facebook: one calling for an independent chairman (Zuckerberg is both chairman and CEO); another calling for a report on how the company’s encryption technology affects child exploitation; and a call for a board report on the misuse of the platform.

See: Facebook opposes adding civil rights expert to its board of directors

In ride-sharing company Lyft, where executives and other insiders have more than 37% of the vote, the shareholder proposal calling for greater disclosure of the company’s lobbying got an overall vote of 39.5% but an outward vote of 73.4%.

“These tech companies are doing well if you look at the value of their stocks,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, which represents nearly 300 institutional investors. “Our concerns are about the long-term sustainability of companies and their impact on society. It is measured over time.

But the two-class share structure isn’t always bad for a business or corporation, some experts say.

“There is short-term shareholder activism,” said Michael Callahan, professor of law at Stanford University and also executive director of the Arthur and Toni Rembe Rock Center for Corporate Governance. “It can be embarrassing for the employees, morale and culture” of a company, especially one whose founder may have a long-term vision that needs time to materialize.

Ritter agreed and mentioned activist investors pushing for hostile takeovers that could result in the loss of employee jobs, for example.

Checks and balances are important, Callahan admitted. He pointed to internal pressures, such as employee activism, that can influence a company’s policies. And shareholders make the difference, depending on the issue. According to shareholder advocacy group As You Sow, there were 34 majority votes for ESG shareholder resolutions in June 2021, breaking last year’s record of 21.

“Exxon was a watershed event,” Callahan said, referring to an activist hedge fund that won three seats on Exxon’s board this year as it lobbied for the oil giant to adopt policies to ‘clean energy. “The market can do a lot.

See: Climate change pressure builds on Big Oil after activist wins Exxon board seats, court ruling hits Shell