When and Why to Love Non-Voting Stock

The Diff, 2020-09-21

Problem Statement

  • Most stock de-facto is non-voting either due to the low ownership percentage (which doesn’t move a needle), or due to the super-voting shares.

  • Asset managers may accumulate enough shares to vote meaningfully, but this voting is not necessarily in the best interests of their individual constituents.

  • But usually voting is just a formality, and the real voting is buying or selling stock.

  • Small shareholders have no say in management appointment or compensation.

Actually

  • On a bright side, those growth companies’ CEOs/execs with real votes (either via stock ownership or supervoting) are not abusing their rights and keep the cash compensation portion of their remuneration packages low or near zero.

  • The inability of major shareholders to replace the C-suite when things go terribly wrong in a firm can bury the company, so the CEO’s altruism is not the universal solution.

Super-Voting Stock benefits

  • Long-term outlook requires saying no to short-term pressures.

  • Protecting high risk tolerance when some Board members don’t share it. [MK: which is quite fascinating because it’s the Board’s job to set the company’s risk appetite and tolerance.]

  • Some managers have contrarian view of the future, and investors expect that median investors (including them) may misunderstand the strategy at the very wrong time.

Risk and Long-term Thinking

  • It’s not proven that investors have a shorter-term outlook than managers. Especially in startups VCs’s idea of maximizing the portfolio’s value is not necessarily the one of founders.

  • Risk tolerance should be managed by investors, not the firm. Buy/sell to the comfort point.

  • Being a contrarian (which is needed for reaching the monopoly status) requires making decisions that investors (via a Board) would try to reverse [MK: it’s a simplification of how shareholders can try interfering into the firm’s business, but let’s just roll with it.] So, a good working strategy is to observe, but NOT interfere.

  • It makes sense to investors to give CEOs more power of making very risky decisions, as CEOs are full-in, and investors can diversify. This is also due to the people having different expectations of future risks

  • Media businesses are known for having dual class share structure to maintain their “integrity” (leading to an echo chamber, for which subscribers happily pay) or to maintain the distribution channels composition and development.

Conclusions

  • Companies exist because their founders figured out something others didn’t understand.

  • Founder CEOs are better at building a future than explaining it.

  • Sometimes a looter CEO is better for shareholders than a risk-hungry CEO spending money on bad initiatives.

  • Voting is a ritual legitimizing the outcome, but individual vote is all but meaningless.

  • source