(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Robert Cyran
NEW YORK, Oct 2 (Reuters Breakingviews) - Super-voting stock is hardly super in terms of value. Facebook (FB.O), Groupon (GRPN.O) and Zynga (ZNGA.O) are among the growing number of companies using multiple classes of shares. Yet their returns are worse than for simpler ownership structures over most time periods, new research finds. Investors should consider they’re often giving up more than just control.
Founders understandably like the arrangement. Starting a firm is an act of faith and success takes years of effort. Selling stakes to outsiders brings in capital for growth and liquidity for insiders, but also can mean losing stewardship. Super-class voting shares allow for the benefits of public capital, without some of the annoying side effects.
New buyers know upfront they’re surrendering some of their rights, but a review of stocks in the S&P 1500 index over a 10-year period suggests the costs are higher. Investor advisory firm Institutional Shareholder Services said on Tuesday that its analysis showed an annualized return over a decade of 7.5 percent for companies that concentrate control in a super-voting stock. Those in the index with a more traditional ownership set-up were less volatile and on average returned 9.8 percent.
Bad governance appears to do damage in numerous ways. Companies with multiple share classes were twice as likely to engage in related-party transactions, ISS found. Incompetent directors are rarely thrown out because there’s little point to a proxy fight. There’s also less accountability. Management isn’t as forthcoming with outsiders and more likely to give misleading answers. Such companies had more weaknesses in their internal accounting, too.
Dictatorships can be valuable in certain, limited circumstances. Companies with one class of stock and one dominant shareholder performed best, returning more than 14 percent a year over a decade. Such situations typically result from corporate spin-offs or an outside investor taking a large stake. With economic and voting stakes aligned, insiders are more likely to make corporate decisions based on their financial merit. For companies with super-voting stock, however, it is becoming increasingly evident that common holders are merely second-class citizens.
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- Controlled companies with multiple classes of stock underperformed non-controlled ones over three, five and 10-year periods, according to a study released on Oct. 2 by Institutional Shareholder Services for the Investor Responsibility Research Center Institute.
- The study, “Controlled Companies in the Standard and Poor’s 1500: A Ten Year Performance and Risk Review,” also found that shares in controlled firms with multiple classes of stock were more volatile, and that controlled firms were more likely to engage in related party transactions and had more weaknesses in internal accounting controls.
- The number of companies with different classes of stock is increasing. In 2002, 63 of the 1500 firms in the index were controlled through shares with multiple voting rights. In 2012, 79 have super-voting stock.
- Study: link.reuters.com/bup92t
- For previous columns by the author, Reuters customers can click on [CYRAN/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
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