Talking about the sale of $3.4 billion worth of shares in SNAP after Snap Inc.’s IPO last week, one of two SEC (Securities and Exchange Commission) members commented on unequal voting rights possibly proving detrimental to investors.
Snap Inc. set a precedent last week by giving outside investors no voting rights with their share purchases, which is now raking up controversy around such a structure not being transparent enough. There are also concerns around the lack of influence that outside investors will have in matters such as strategy or even executive pay.
According to Snap Inc., the voting structure is actually good for investors because it preserves founder control. A lot of other tech majors have, in recent years, offered shares with limited voting rights, and this despite institutional investors increasingly asking for more rights in order to facilitate better corporate governance.
The SEC itself is facing a unique problem because three of five commission seats are vacant, with Commissioner Kara Stein and acting Chairman Michael Piwowar being the only two remaining. Wall Street attorney Jay Clayton has been nominated by President Donald Trump for the position of permanent head of the SEC, and Clayton’s confirmation will put Stein in the minority, thereby limiting her influence, according to a Reuters report yesterday.
Stein’s stand is that companies that offer IPOs without voting rights should be scrutinized, since the general idea is that shareholders are meant to check management actions. No voting rights means shareholders have no say in what the company does or doesn’t do. While this works in many cases, a lot of larger companies are afraid of diluting founder influence over the direction their companies take.
In hearing this Thursday, Stein said:
“In the long run we need to critically assess our regime for initial public offerings. The current structure is premised on taking investors’ capital while giving the investor rights to hold that company’s management accountable of that capital.”
Stein did face an opposing voice at the hearing, in the form of attorney David Berger of Wilson Sonsini, who advises several tech companies on corporate governance. According to Berger:
“a governance system that focuses entirely on stockholders … ignores the broader interests of the corporation.”
Berger also noted that in several cases, shareholder activists typically target these tech companies’ cash balances, as well as high R&D spending.
Several institutional investors are now calling for further reviews with stock exchanges that list companies with unequal voting rights. Ken Bertsch, executive director of the Council of Institutional Investors, says that such share structures (like Snap Inc.’s) pose risks to investors, specifically the risk of the founders remaining in control “decades after their prime.”
Of note is the fact that the majority of index fund providers prefer to carry shares of companies that have equal voting rights.
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