There used to be a thing where all shareholders were considered equal.
When I’m explaining to friends over wine and board games how the share market works - we are a super fun bunch - I basically pitch it like:
“When you buy shares of a business, you’re becoming part owner. Doesn’t matter if you have one share or one million shares, you’re a part owner.”
This pitch is attractive because it shifts the mindset from consumer to owner.
Rather than be a person who just buys products, be a person who owns bits of the companies who make the products. Why not try to make money off the fact that you, and hopefully lots of other people, buy stuff from that company and that company is profitable?
But this message also implies that every share is equal.
You have as much right to stand up and berate the CEO at an annual general meeting for being a close-minded twat, or a dreadful cash allocator, or completely visionless, with your 1% holding as you do with a 12% holding.
And Australians certainly exercise that right.
I can remember an energy company’s shareholder meeting where a tiny, nasal woman cornered the microphone for 15 minutes complaining she thought electronic shareholder communications (email) were an unnecessary cost, told the CEO she thought his marriage breakdown was distracting him from the business and then asked if it was possible the next AGM could be held closer to her home town of Moruya.
She was cute, and You Go Girl, but it was an instance where some in the room might have wished some votes counted less than others (or voices weren’t allowed so much airtime).
But that’s democracy for you!But the theory stands that she, and you, are all part owners of the business and you have voting rights in how the company is run.
Which brings me to the question of, what are the ways that we as shareholders can actually make a difference in some of the biggest companies in the world?
And the answer is basically: some animals are more equal than others!
I’m referring to classes of shares.
There are classes of shares that mean people have different voting rights and it’s a dominant theme in a lot of the companies we are invested in.
It’s a trend in companies like Facebook, Tesla, Berkshire Hathaway, Google (Alphabet), GoPro, and Snap.
And Lyft - the ride sharing company planning to IPO this year - is also issuing some different classes of shares. It’s called a dual class share structure.
Which means there’s one class of shares for you and me and the lady with the microphone, and another for company insiders (like the Lyft founders) or for those who can afford a vastly different price tag (like those that can afford Berkshire Hathaway Class A shares).
One defence of this dual-share structure, is that it allows the founders or family heirs or seed shareholders or whoever, to take a long term view, and make investment decisions that may not get results in the short term, and basically allows them to stay in power for as long as it takes to realise their vision.
Which, in some circumstances, is not a bad defence. Shareholders could possibly kick out visionary founders just because they missed earnings expectations or revenue dropped a bit and shareholders wanted returns on their investments now now now.
But it’s worth understanding how founders and CEOs engineer the share structure in order to reduce that risk.
Mark Zuckerberg is the 34-year-old dude running Facebook.
Facebook has Class A shares (that you can buy on the stock market) and it has Class B shares (that you can’t).
Class A shares have one vote per share.
Class B shares have 10 votes per share.
Zuckerberg, and a small group of insiders, hold about 18% of Facebook the company (as at March 2018).
But they hold that 18% through Class B shares.
With 10 votes per share, that means they have almost 70% of the company vote.
Zuckerberg himself accounts for nearly 60% of the company vote.
The other 82% or so company votes, including perhaps voting rights you, me and Spaceship Voyager managed funds hold, are fractionally allocated the other 30%.
So if, for example, Facebook was a public company that suffered a massive data breach that exposed sensitive data about millions of customers without their consent and that data was used for nefarious purposes, and then Facebook found out about the breach, and waited a few years to disclose it and then the share price fell and everybody felt a bit uneasy about politics and self identity for a while...
...and us Facebook shareholders thought that was a bit weird and we banded together to say, hey! We gave you our money via the stock exchange and we think you should run this company differently!
And Zuckerberg was like, I hear you! I’m the executive! We’re a Facebook family or whatever! But in this instance and all other instances (probably) you’re wrong because we weren’t breached ... that Cambridge Analytica mob were actually contractors... and anyway whatever let’s not split hairs, I reckon we should do things this way and in fact we’ve already started doing it because I’m literally, in all ways, the boss of this company!
And we all go...okay?Because the alternative is selling our shares and not playing at all. It’s up to us how we want to participate.
Lyft is hoping to engineer a similar structure. Where the founders - Logan Green and John Zimmer - will issue shares to the public, but will retain just under 5% of the company’s stock.
But! That 5% will be made up of Lyft’s class B shares! Which get 20 votes each!
And the rest of the shares issued to the market will be class A shares. Which get one vote each.
So that 5% will control almost 49% of the company’s votes. And when you take into account the various employees and directors who also have shares in the business, that bunch of people will control 61% of the voting stock.
So it’s kind of like, Lyft wants your public money! But not your input!
Helpful to know if you are hoping to scale yourself to the heights of Warren Buffett.
Pick your share class type carefully!
Enjoy your week.
