The continuing troubles at Uber have placed renewed focus on the dominant form of corporate organization among internet companies in Silicon Valley: voting control concentrated in the hands of a small number of founding principals, with the vast majority of shareholders having little or no say in corporate affairs.
The companies in question have more than one class of stock. The shares the public holds have either no say at all or, at best, a small fraction of the voting power each of the founders’ shares have.
Tech entrepreneurs didn’t invent the idea of multiple share classes. Companies like Hershey, the NY Times or News Corp. have had this structure for decades. And, yes, it does create problems. Insiders are free to ignore the concerns of outsiders, who have little recourse other than to sell their holdings. Of course, in the case of Uber, that’s easier to say than to do.
I think it’s striking, however, that the other prominent corporate name in the news today is GE, a company with a long history and a wide-open corporate register. GE’s CEO, Jeff Immelt, is being forced to retire after 17 years at the helm–during which time GE has been a chronic underperformer.
I have some sympathy for Mr. Immelt, who, as far as I can see, inherited the terrible mess that his predecessor, Jack Welch, had created at GE by the turn of the century. Even if we say Immelt’s first half decade was spent cleaning things up, though, it took a subsequent lost decade before the board decided to make a change. And that is arguably only because an activist began to stir the pot.
…vs. J C Penney (JCP)
Then there’s the cautionary tale of JCP, where an investor group led by Pershing Square took control of the board a number of years ago. The newcomers carried out a number of disastrous changes in JCP’s strategy that caused the firm’s profits–and its stock price–to crater. They then convinced the board of directors to repurchase their stock at what I judge to have been an extremely favorable (for them) price–and disappeared.
In this case, having only one class of stock, and no dominant insider, worked to ordinary shareholders’ disadvantage.
To be clear, I’m not an advocate of having several share classes. But I don’t think that’s the Uber problem.
As I see it, early investors backing Uber made a bad mistake in their assessment of the quality of the company’s management. And by not providing enough mentoring they allowed a toxic corporate environment to proliferate. The fact of multiple share classes makes it harder to rein in a renegade culture. But take the multiple classes away and Uber would still have become what it is, I think.