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Thursday, 30 October 2014

Silicon Valley aristocracy

Google rejoins tech's governance race to bottom

Google is no stranger to bad corporate governance. It set off the trend in Silicon Valley when it established super-voting shares in its 2004 market debut. Insiders Larry Page, Sergey Brin and Eric Schmidt now control 66 percent of the votes with about a quarter of all shares. But the three have watched newcomers Zynga and Facebook surpass them in the governance race to the bottom. So Google’s founders are getting back in the race by adding a third class of non-voting shares. That’ll do little more than entrench insiders and enable the future abuse of minority shareholders.

Under the proposal - which is sure to be passed due to insiders’ support - all shareholders will receive a dividend of non-voting stock in what amounts to a stock split, while keeping voting proportions unchanged. All future equity grants to employees are expected to be in the form of non-voting shares.

Page and Brin argue that separating voting control from economic interest has served the company well - allowing them the freedom to make long-term bets such as its Android operating system for mobile phones and its Chrome internet browser without having to keep a constant eye on quarterly results.

Yet there’s little reason to split a stock besides cosmetic appearance. Investors tend to award superb managers in any company lots of leeway. Steve Jobs, for example, could exercise dictatorial powers at Apple with only a small voting stake.

Moreover, Google’s insiders already retain a complete chokehold on the company. The company would need to issue more than 300 million common shares - or almost double what’s currently outstanding - for Page, Brin and Schmidt’s combined voting stake to slip below 50 percent. Assuming Google didn’t split its stock, that’s enough for an all-paper acquisition of two Facebooks or decades’ worth of stock grants to employees.

Yet this change enables more pernicious effects. Non-voting stock will allow Google to purchase rivals or issue stock to employees without diluting insider control. True, the founders won’t be able to sell their non-voting shares without seeing their voting stake go down due to a “stapling” provision. But such clauses can be changed. The interests of insiders may eventually diverge from minority shareholders’ - just look at how much grief Rupert Murdoch’s control of News Corp has caused its investors. Google may not want to be evil, but this action certainly enables its insiders to be.

Context News

On April 12 Google Chief Executive Larry Page and fellow co-founder Sergey Brin announced the company is to create a new class of non-voting stock. The shares will be distributed to all existing shareholders via a stock dividend. Each shareholder is to receive one new non-voting share for each voting share in what amounts to a stock split. All future equity grants to employees are expected to be in the form of non-voting shares.

The new shares will be assigned a separate stock ticker symbol, which has yet to be determined.

Google currently has two classes of stock. Class A shares with one vote and class B with 10. As of Dec. 31, 2011, Larry Page, Sergey Brin, and Eric Schmidt owned 92 percent of all B shares and approximately 66 percent of all votes. The three have agreed to “stapling” provisions wherein they must reduce their voting shares in tandem with their economic interest.

The search firm also reported net revenue of $8.1 billion in the first quarter after subtracting the cost of acquiring internet traffic. That is 24 percent higher than the same period last year.

Google’s net earnings increased 59 percent to $8.75 per share over the same period.

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