A DICTATORSHIP: Founders have dictatorized
companies. Back on September 16, 1985, Steve Jobs was fired from his own company:
Apple. Fans like to argue that this was completely unjust and unfair, and from a moral perspective,
they’re right. It is unfair to kick out a founder from their own company, but it was also effective.
While Apple got destroyed over the next decade, Steve Jobs had the opportunity to grow as a
leader, a family man, and a visionary. And when he returned 12 years later, he was able to make Apple
into the world’s largest company. Looking back, even Jobs himself has agreed that getting fired
was the medicine that he needed. This isn’t to say that all founders should be fired from their
companies to be grounded and put in their place. But, what it does show is that even the smartest
minds in the world are just straight up wrong from time to time. And this is precisely why
large public companies have boards, chairmans, shareholders, and an entire executive team. The
idea is that there’s a system of checks and balances that ensure that no single person
becomes too powerful, but this is no longer the case. Modern companies still have boards
and investors and executive teams but all of that is just for show. At the end of the day,
the person who has all the power is the founder or founders. Now, this is no problem if we’re talking
about a private company or the given founders have a stake of over 50%. But with modern tech giants,
this is not the case. Take Mark Zuckerberg for example. Over the past few years, he’s
been gambling tens of billion on the Metaverse, something that investors haven’t exactly been
excited about. To make things worse, much of their launched Metaverse products have flopped beyond
belief boasting as little as 38 users. All of this has given Zuckerberg a favorability rating of just
22% or only half of even Donald Trump. This is precisely the type of situation in which a
CEO would be fired, but Mark doesn’t have to worry about that. You see, Mark only owns 13.6% of Meta,
not much more than Steve Jobs’ stake of 11% when he was fired. So, nowhere near a majority,
but see, modern founders have learned from their predecessors. They know what can happen if they
give away majority control. So, while they may give away a majority stake in their company,
they never give away majority control. How you ask? Well, they’ve brilliantly made a distinction
between equity and voting power. While Zuckerberg only owns 13% of Meta, he controls 54% of the
voting power. A similar story can be seen with Google. At this point, Larry Page only owns 6.1%
and Sergey Brin only owns 5.7%. But, together, they control 51.2% of Google’s voting power.
This means that despite have single digit stakes, this duo has ultimate control of a $1.3 trillion
company with 180,000 employees, tens of millions of investors, and billions of users as this is the
story of how founders abused their power. This is the story of how founders dictatorized companies.
A BANNED PRACTICE:
The root of modern day founders’ power is thanks to multiple classes of stock with different voting
powers. Class A stock might come along with 1 vote per share while Class B stock comes along with 10
votes per share. The average investor doesn’t even realize this, but many companies actually
have different classes of stock on the public market itself. Likely the best example of this is
none other than Google. If you look up Google on your brokerage, you may come across the following
listing: Alphabet Inc Class C, ticker symbol GOOG. At first glance, it looks like Google stock. The
market cap checks out, the PE ratio checks out, the price looks about right. And that’s because it
is technically, Google stock, but what it isn’t is Google stock with voting shares. This means that
you can buy a billion of these shares and invest a $100 billion, but you wouldn’t even get a single
vote. If you want voting power, you need to buy Alphabet Inc Class A stock or ticker symbol GOOGL.
Basically everything about this share is identical to the Class C shares, except you’ll get 1 vote
for every share that you own. But, the shares that you really want are Class B shares. With Class B
shares, you get 10 votes for every share you own. But, you can look all you want on any brokerage
you can find, but you’ll never find Class B Google shares, as Class B shares are reserved
for founders, VC firms, and other close insiders. Most investors don’t look into this too much. They
figure that their 1000 or even 100,000 votes won't really make a difference at Google. And they’re
right, as an individual, they can’t really make a difference at these companies. But the fact that 1
or 2 people have all the votes that everyone gives up does make a difference, and that’s why multi
class stock structures were banned for over 50 years. You see, multi class stock is by no means a
new invention. It’s actually been around for well over a hundred years, but it was a frowned upon
invention. The first American company to issue multi class stock was the International Silver
Company back in 1898. Originally, this wasn’t considered to be a big deal. Founders wanted
a bit more control over their companies and given that information wasn’t nearly as accessible as it
is today, it made sense for investors to be more passive. But, over time, founders started becoming
more and more aggressive. What started off as 1 extra vote became 5 extra votes and then 10 extra
votes and then 20 extra votes. This practice only became worse with the roaring 1920s as everyday
people started buying stocks. They didn’t care about voting shares or earnings reports, they just
wanted to be a part of the Rockefeller fortune or the Ford fortune. This gave companies plenty
of room to test the boundaries until one company pushed it way too far: Dodge Motor Company. In
1925, Dodge would have one of the most infamous IPOs of all time. They would exclusively issue
shares with absolutely no voting power. This meant that the insiders could own just a single share of
stock and retain 100% voting power, and that’s exactly what they did too. The insiders owned
just 1.7% of the company had absolute control over the company. Investors were obviously pissed and
this led to an uproar on Wall Street. The New York Stock Exchange would end up siding with investors
and in 1926, they would officially ban dual class stock. This is where the story should’ve ended,
but this practice has not only been revived, but it has taken over the market once again.
REVIVING THE DEAD: Throughout the next 54 years,
the stock market operated perfectly fine. Billionaire founders were made, millionaire
investors were made, and everyone had completely forgotten that dual class stock was even a thing,
but this would all change on February 8, 1971. This was the day that the NASDAQ was created. If
you’re not familiar with the NASDAQ, you should check out our video about them but long story
short, they technolofied the stock market. Before the NASDAQ, investors had to call stock brokers
at the NYSE and place buy and sell orders and everything would be done manually. But,
with the NASDAQ, the entire stock market was made electronic paving the road for how it is today.
This was obviously the superior technology but investors weren’t impressed. They couldn’t care
less if quotes and trades was electronic or not. In fact, they preferred to call a broker that they
knew and trusted for 20 years. So, despite offering great tech, the NASDAQ struggled
to get investors throughout the 1970s. To make things worse, the NYSE had started ripping off
NASDAQ’s tech and were rapidly modernizing their own systems. So, things looked pretty bleak for
the NASDAQ. Investors weren’t using the exchange and their main advantage was rapidly disappearing.
So, in the early 1980s, they would decide to pivot their strategy. Instead of trying to attract
investors, they started going after companies. If companies were exclusively listed on the NASDAQ,
investors had no choice but to buy through the NASDAQ. With that, the NASDAQ started charging far
lower fees than the NYSE for companies and they still do to this day, but this too didn’t work.
You see, there was a certain prestige and heritage to the NYSE. JP Morgan Chase wasn’t gonna switch
exchanges just because you charged less. And with that, the NASDAQ was back to ground 0. They were
worse off actually as they were now earning lower fees as well. Throughout all of this,
the NASDAQ couldn’t help but notice that one exchange was actually succeeding at taking on
the NYSE: the AMEX, not American Express, but the American Stock Exchange. One of the main
factors that distinguished the AMEX from the NYSE was their policy on dual class stock. The AMEX
allowed for DCS with a voting ratio of up to 10 to 1. The NASDAQ didn’t have any DCS restrictions
to begin with, but now they knew that this was precisely what they needed to lean into.
There were two target markets with this strategy. The first was tech companies who were fearful that
investors weren’t really informed on tech which was very much true at the time. The second was
companies that were targets of corporate raidings. If these companies were able to
distinguish between ownership and voting power, they could protect themselves from corporate
raiders. Given that corporate raiding was at its peak throughout the 80s and that tech stocks would
go vertical in the 90s, the NASDAQ would also go vertical. Seeing this, companies listed on
the NYSE would threaten to switch to the NASDAQ if they didn’t allow for DCS. And with that,
the NYSE had no choice but to unban DCS in 1986. With that being said though, companies were pretty
reasonable in the early days. In fact, some notable NASDAQ companies didn’t even opt for
dual class shares like Apple and Microsoft. But, there’s always someone who ruins it for everyone
else. And in the case of dual class stock, it was our good old friends Google and Facebook.
ULTIMATE CONTROL:
Nowadays, most tech companies opt for a dual class structure because I mean why
wouldn’t they. The average investor isn’t even aware of it, the practice has been normalized,
and it gives founders ultimate control. It’s one of those things where it’s like:
if no one is opposing it, why would you not do it? Some notable tech companies who have
adopted this practice are Snapchat, Dropbox, Lyft, Kayak, Robinhood, Coinbase, Zoom, Roku,
and Trip Advisor, but this practive is by no means limited to tech companies anymore. Some
legacy companies leveraging DCS include Coca Cola, Ford, Nike, Levi, and Hyatt Hotels. Also, don’t
bet on media companies to report on this issue as the most notable ones leverage it themselves
including the New York Times, Fox News, CBS, and Comcast. And there are of course extreme examples
as well. The Ford Family for example owns 4% of the stock but control 40% of the voting power.
Similarly, Echostar CEO Charlie Ergen owns 5% of the company but controls 90% of the vote. So,
let’s just say things have gotten pretty bad, but I do want to point out some notable exceptions
starting with Amazon. While Jeff Bezos gets a bunch of critique for his practices,
this is not one of them. Another exception is Elon Musk and Tesla. In fact, this is why Elon was able
to be forced to give up his chairman position in 2018. And as for a startup that’s going against
the trend, we have Uber. So, the good news is that some companies are doing the right thing. Also,
the S&P 500 is putting up some resistance as well. Starting in 2017, they ruled that companies with
multi class stock will no longer be added to the S&P 500. This is the main reason that many
notable startups like Snapchat have been unable to join the index despite their size. And given
that index fund investing is on the rise, newer companies will very much be losing out if they’re
not part of the index. Will this be enough to stop the practive altogether? Probably not, but it is a
step in the right direction. Did you realize how these founders were monopolizing voting power?
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