Dual-Class Shares: Governance Risk and Company Performance

JUNE 13, 2019

Initial public offerings of companies with dual-class shares have made headlines in recent years. An increasing number of newly listed companies have introduced classes of stock with superior voting rights, which typically allow company founders and top executives to maintain company control even as their economic stake in the business may diminish. Dual-class companies include some of the most successful and highly-valued companies in the world, such as corporate giants Facebook Inc., Alphabet Inc. (parent of Google), and Berkshire Hathaway Inc. In 2019, some of the largest U.S. IPOs involved classes of stock with superior voting rights, including ride-hailing services company Lyft Inc., social media platform Pinterest Inc., and jeans maker Levi Strauss & Co.

Many investors and corporate governance experts sound the alarm about the growing prevalence of dual-class share structures, given the potential risks that such ownership arrangements pose to common shareholders. They argue that the discrepancy between control and economic ownership reduces accountability to the economic owners of the business, entrenching management and skewing incentives. Meanwhile, proponents of the dual-class share structure contend that control is necessary to protect the company from the short-term pressures of the market and to allow management to focus on growth and long-term strategy.

In this article, we review some of the key trends in dual-class share structures in the U.S., and we examine the links between dual-class share structures with corporate governance and company performance.

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