The late Goldman Sachs (GS) co-chair John Whitehead, who believed investors should have a vote for every share they hold, would not be happy if he saw the terms of Snap Inc.’s IPO. Underwritten by Goldman and Morgan Stanley (MS), the company made its debut on Wall Street Thursday, and offered common shares to the public without any voting rights.
“One share, one vote” was a mantra Whitehead believed in—and in a September 2006 conversation with me on a video series my company produced, Whitehead told me that he thought Goldman and other investment banks should not underwrite shares that offer no or limited voting (like those that tech firms Google and Facebook have). Though always reluctant to directly criticize his alma mater, Whitehead said that shares without voting rights were destructive to capitalism’s very basis, and that given underwriters’ special role in the capital markets, they had a moral obligation to refuse the business.
At Snap (SNAP), only pre-IPO investors who own private shares will be able to vote on company matters, allowing Snap to avoid certain public disclosures around pay and board structure that they might otherwise have to provide in voting materials, Skadden Arps attorney Thomas Ivey told me. In addition, Snap, with less than $1 billion in revenues, filed as an emerging company under the JOBS Act, which will allow Snap to avoid requirements related to internal controls over its financial reporting.
Whitehead has not been alone in his thinking that the “one share/one vote” philosophy matters. Many others, including yours truly, share his concern that shares with unequal or no voting rights are harmful. And Whitehead’s concerns are truer now more than ever, given the current political climate.
To be sure, there are potential checks on excessive corporate power beyond the votes of shareholders. Labor, consumers, and the media are a few examples of groups that may weigh in. Yet the current capitalist system is constructed to provide formal checks on corporate excess from only two sources: government regulation and investor sway.
Today, while President Donald Trump may be asking companies to be better U.S. corporate citizens by keeping jobs in the country, his administration seems hell-bent on gutting government regulation related to the environment and capital markets (for example, spending funds to re-review the cost/benefit analyses recently performed by the SEC related to Dodd-Frank). That leaves common shareholders with voting rights as the other check.
One entity created under Dodd-Frank to advise the SEC on regulation is the Investor Advisory Committee (IAC). That committee will be meeting Thursday with plans to review the implications of shares with unequal—and no—voting rights, like Snap. Ken Bertsch, executive director of the Council of Institutional Investors, with over 120 pension and other institutional investor members representing over $3 trillion, is scheduled to provide testimony before the IAC at its meeting. I caught up with him yesterday to get a preview.
While dual-class shares with limited voting were a race to the bottom, Bertsch says the Snap IPO with no voting shares may mean “we have now hit bottom.” Bertsch says Snap, although public, can now operate pretty much like a private company. Therefore, he argues Snap shouldn’t be allowed in indices of public companies that investors invest in, like those produced by S&P, FTSE Russell, and MSCI.
He makes an excellent point. When you are investing in the public markets and a public index, there should be some baseline disclosure and auditing standards required. If Snap wanted public ownership funds without the voting strings, the firm could have issued preferred stock. After all, that’s what preferred stock is all about: public equity funding without share votes.
Clearly Congress and the SEC have been asleep at the switch in allowing this. So, too, has been the New York Stock Exchange (NYSE), which allowed the listing. Bertsch told me he is worried that the IPO will infect other markets beyond the NYSE and NASDAQ, which he says next to the Netherlands, have the lowest standards in the world. He is aware of rumblings in Singapore and Hong Kong that could signal a worldwide deterioration, as those two might now begin to allow dual-class offerings. It is concerning to think that companies can call themselves public, but lack the accountability that public company status should require.
Wilson Sonsini attorney David Berger will also be speaking at the meeting next week, and I caught up with him yesterday. He thinks, as I do, that there may be a need to consider a fundamental change in the governance structure of the capitalist system. (My views can be found in several articles for Fortune, most notably in early 2015 and then last year.) During the meeting, Berger plans to discuss a paper he recently authored on the topic called In Search of Lost Time. Many changes are possible, but moves to extend power over corporate excess beyond shareholders to other stakeholders such as employees and communities could be highly beneficial.
Although Bertsch and Berger may frame their arguments as opposing views, I believe the two can be compatible. Let’s restore one share/one vote to shareholders while also working to change the system to give other important stakeholders more say.
Eleanor Bloxham is CEO of The Value Alliance, an independent board education and advisory firm. She is the author of two books on corporate governance and valuation.