Google’s Stock-split Plan Would Replace Stewardship with Dictatorship

Simon C.Y. Wong

April 18, 2012

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When Google introduced a controversial dual-class share structure at the time of its IPO in 2004, I had
reservations (as you would expect of someone whose specialty is corporate governance). But the
founders’ passionate advocacy of the need to follow a “long-term, innovative approach” resonated with
me. However, its recent proposal to effect a 2-for-1 stock split by issuing non-voting shares is an
abhorrent idea that should be rejected.

In recent years, the trend globally has been to eliminate or reduce the severity of multiple share classes
in order to loosen the grip of dominant shareholders, reduce the potential for abuses that typically arise
with entrenched control, improve the access of companies to external capital, and boost the valuation of
firms.

Take Brazil. A decade ago, when the Sao Paulo Stock Exchange created the Novo Mercado listing segment
(which has since become the primary venue for IPOs in that country), it proscribed non-voting shares.
Similarly, countries as diverse as South Korea, India, and Russia now allow only a one-share, one-vote
structure.

In West European countries where multiple-share classes are permitted, some governments have sought
to reduce the “power distance” created by differential voting rights. In Sweden, where there is broad
societal support for “strong” owners, non-voting stock is prohibited. Moreover, the government
amended the company law in 2004 to require companies with dual-share classes to narrow the disparity
of voting rights from the then-prevailing ratio of 1,000 to 1 to a maximum of 10 to 1. To prevent abuse by
the dominant owners, Sweden provides non-controlling shareholders with important protections, such
as membership on the board nominations committee for a firm’s top 3-4 shareholders and a 90%
shareholder-approval threshold (by economic interests) for any proposal to issue equity to executives
and related parties.

Furthermore, some European companies have — on their own accord — converted their multiple share
classes into a single class where all shareholders possess the same voting rights.
Given my sympathy for the “long-term, innovative approach” elucidated by Google in 2004, why am I so
opposed to its plan to issue non-voting stock? Moreover, isn’t Google’s proposal analogous to the
current discussions in the U.K. to give long-term shareholders greater voting power?

The ideas being debated in the U.K. to encourage investor “stewardship” differ from Google’s proposal in
two critical respects. First, no one has seriously advocated completely disenfranchising short-term
shareholders in terms of voting rights. Rather, they argue that these investors should be accorded a
“softer” voice. This distinction matters from both a principled and practical perspective.

As a matter of principle, it is important to provide all shareholders a voice through voting so that they
have an avenue to express their views and concerns (and, correspondingly, so that controlling owners
can “take the pulse” of the broader shareholder base). Practically speaking, the prospect — however
remote — of losing effective control (for example, due to large stock-based acquisitions) may prompt
controlling shareholders to think harder about key strategic decisions.

Second, the proposals under consideration in the U.K. are “inclusive” in that all shareholders would be
eligible for enhanced voting rights provided they meet the qualifying conditions (still to be defined). In
other words, superior voting rights would not be confined to a fixed, pre-determined group of owners.

The hazards of entrenching control through non-voting stock can be seen at a number of companies,
perhaps none the more so than at News Corporation where — despite multiple investigations of serious
misconduct in recent years — the dominant shareholders remain in place.

While shareholders should support strong stewardship by Google’s founders, they should not be
complicit in anointing dictators by assenting to receive non-voting stock. That, in Google-speak, would be
“evil