Should You Boycott These Big-Name Stocks?


Good corporate governance policies include shareholder-friendly stances. One heavyweight shareholder that agitates for corporate governance changes is taking on a high-profile target: dual-class stock structures.

Pension fund and activist investor California Public Employees' Retirement System, also known as CalPERS, has suggested it will campaign against and boycott stocks of companies where management and insiders control the majority of the shareholder votes.

Class warfare
Dual-class ownership structures aren't a new innovation. Media companies have instituted them for years; one rationalization is retaining editorial control. TheNew York Times (NYS: NYT) and Washington Post are two good examples of media companies that have long utilized the practice.

Other corporate managements have caught on to how diabolically delightful it is to keep this degree of control over anything that's subject to a shareholder vote. When Google (NAS: GOOG) went public in 2004, it used a dual-class structure to give Larry Page, Sergey Brin, and Eric Schmidt "control over Google's destiny," as the company's original shareholder letter put it.

Here's the bottom line: In such arrangements, the class of stock that management and insiders own possesses far more voting rights than the regular shares you or I would purchase; a typical ratio is 10:1. Non-insider investors will never win any vote that's presented to shareholders.

The practice undermines the idea that all shareholders are owners, since some special, anointed shareholders retain control. It basically turns shareholders like you and me into second-class citizens.

New media goes old school
The idea that solid corporate governance policies help avert corporate disasters, and even large-scale macroeconomic ones, is gaining traction. You'd think practices like dual-class stock structures would sound positively prehistoric in the increasingly wired and connected world that social media has helped create. However, that hasn't been the case at all in the recent batch of IPOs.

Facebook (NAS: FB) went public with a dual-class stock structure, like many other recent social media companies. Facebook's Class A shares for regular investors have one vote per share; Class B shares have 10 votes per share.

Soccer team Manchester United (NYS: MANU) is a heck of a weird idea for a publicly traded company, and it also has a dual-class structure in place. Like Facebook, its Class B shares possess 10 votes each versus Class A's single vote per share.

Zynga (NAS: ZNGA) took the whole concept even further into outrageous territory, having three classes of shares when it went public. Class A shares have one vote per share, Class B shares have seven votes per share, and Class C shares have 70 votes per share. Not surprisingly, Zynga founder and CEO Mark Pincus holds all the super-powerful Class C shares.

Google recently decided to make its dual-class stock structure even more shareholder-unfriendly by issuing a third class of stock that it will push on existing investors through a stock split. This new class of stock possesses no voting rights. Needless to say, this is a way for Google's management to heighten its already tight control over the company. It's also grounds to consider selling the stock on principle.

Even if principle isn't enough, performance might suffer, too. In May, James Surowiecki wrote on the topic for The New Yorker and cited a study that tracked a significant number of companies with dual-class structures from 1994 to 2001. The researchers found those companies had underperformed the market.

In other words, all that coveted management control isn't necessarily good for anyone but managers' own egos -- and possibly pocketbooks.

Don't allow yourself to feel out-classed
The dual-class stock structure allows corporations to access public capital without acknowledging -- much less respecting -- the traditional ownership concept of buying and holding shares in a public company.

It also underlines exactly what's been going wrong with many American public companies over the years. Managements and boards have run roughshod over investors, trying to convince everyone that shareholders aren't an important or significant part of the equation.

Don't let the "shareholder value" rhetoric sway you, either. Corporate America has become adept at rationalizing poor behavior and poor performance while implying that unhappy shareholders should simply sell.

Multiple-class stock structures simply make perfectly clear managements' intentions and their desire to escape accountability to other shareholders. There's a perfectly good argument that these companies should have simply stayed private if they were unwilling to truly live up to the spirit of being publicly traded and owned.

CalPERS is a megapension fund with $237 billion in assets under management, so its impact on the companies and issues it tackles is significant. Its harsh stance on the increasingly frequent dual-class stock structure is perfect timing and should help increase the spotlight on the practice. Shareholders should take note of this dangerous duality and consider some boycotts of their own.

There's a lot more to Facebook than its dual-class structure and CEO and founder Mark Zuckerberg's control. Check out our premium report on Facebook, which examines the key opportunities and risks that face the newly public social media company. Click here to find out more.

Check back atFool.comfor more of Alyce Lomax's columns on environmental, social, and governance issues.

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