A change in the control structure of Tech companies

Marc Andreessen has thought about the perennial problem of allowing management of public companies to operate with long term objectives in a short term world (sparked no little bit, one assumes, by the Yahoo Saga). His solution - tiered stock, where some stock has greater voting rights than others, typically so that founders and early investors retain disproportionate control for their declining economic stake:

After 15 years in the technology industry, though, I have done a complete 180-degree turn on the topic -- with some caveats.
I come not to bury dual-class stock structures, but to praise them.

I now believe that dual-class stock structures are a great idea for a technology company that is in the process of going public, under the following conditions:

- The key leaders of the company -- typically the founders -- who will own the controlling Class B shares, are also major economic shareholders in the company. They own a significant portion of the company and are therefore highly incented to maximize the value of the company over time.

- The key leaders of the company who own the controlling Class B shares have a long-term goal of building a major franchise, and the commitment required to execute against that goal.

- The controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.

- All public shareholders understand what they are getting into up front -- no bait and switch.

The key to the whole thing is shared goals -- particularly the shared goal of long-term value creation, particularly the creation of a long-term franchise, the kind of franchise that can require 10 years or longer to build.

It's a very interesting post, especially in his argument that short termism has risen owing to the increasing proliferation of hedge funds, private equity companies etc who are, as he notes:

....wonderfully skilled at paying themselves; on average, their franchise-building skills are questionable at best.

The issue, though, as with all matters of entrenching control, is what do you do when the people in control are no longer the greatest guys on the planet, and where commitment has slipped somewhat. Marc talks about the New York Times and other US Media companies, where dual stock companies seem to proliferate:

....dual-class stock structures are not exactly good investments today, since their entrenched management teams can fight off shareholder activists and hostile takeovers indefinitely while riding their declining franchises straight into the ground...

....And remember, the New York Times Company had its dual-class stock structure for decades, and for much of that time, ordinary investors would have done very well to own its shares.

His thesis is essentially Caveat Emptor et Cave Canem - speaking of the New York Times:

But on the other hand, it's not like you couldn't have seen it coming. Every investor in any declining dual-stock media company today knew they were buying into that stock structure and did it with their eyes open. And any investor still holding stock in such a company has been aware of the Internet for 15 years and has been able to track the performance of the company's management team in dealing with the Internet over that entire time. Certainly it's possible to be delusional about your investment and think that recovery is right around the corner, but you can't blame the stock structure for that delusion.

And certainly caveat the poor pawn....I mean faithful employees of the business. Google is quoted as the Good Guy example, where Marc notes that:

....Google may actually be getting a premium in the market due to its dual-class share structure, as investors are able to make a clean bet on long-term value creation, and they know that the core team can just put their heads down and power through any short-term nonsense.

I think Google has changed the rules on this topic -- I think many technology companies, certainly the ones with high potential, that go public over the next decade will have dual-class stock structures, due in part to the Google precedent.

It would appear Facebook has engineered some sort of control structure like this, if Sarah Lacy is to be believed (noting Marc's view that the number of decent financial Tech & Finance journalists is very small )

What is less well known is that there are actually five seats, Mark just controls three of them.

This has been nothing but a positive for Mark, and so far, for Facebook... .....had this board arrangement been different, so many pivotal moments in the young company's history would have turned out drastically different. The News Feed debacle, turning down Yahoo's overtures, even -- arguably-- Mark's lock on the CEO slot. Mark knows this.

(Facebook a Beacon FOR disproportionate control ? ...no doubt the cluetrains ran on time too ). Sarah notes something else in passing, which I think gives the game away:

Like Peter Thiel, Andreessen is a big believer in founders as CEOs and early on, before Web 2.0 was even sexy, he was the guy trying to convince a lot of Web 2.0 companies not to sell. Frequently, they didn't listened.

Indeed, some tooked the money and ran for the hills - of Aspen, and the sands of Malibu etc etc. So am I seeing a bellweather moment here? The Tech industry now adopting the structure that has served media so badly?

I can see why its of interest (to founders and VC's), but I don't quite read it the same Utopian way as Marc, ie tiered structures are great for freeing Da Heroic Management from the slings and arrows of outrageous fortune hunters. It looks to me that this is also possibly being used as a tool by the early financial backers to (i) bind in high potential senior management to jump big fences rather than sell out for a mere $100 million or so , and (ii) to be able to take in large amounts of extra funding without relinquishing control, the typical fate du jour of the early day investor. I can see newbie founders being seduced by this too - Sarah Lacy notes re Mr Z that:

Smart -- and previously burned-- people advised him well when he was starting Facebook. It's not an accident the company has this structure.

But once in harness, it may be quite another thing to get out......

(An afterthought - given the obvious attraction of such a model, its surprising that it isn't more common - but as Eric Beinhocker notes, companies compete in a darwinian world and their structure is part of that adaptive evolution - thus I suspect one reason why there are not more of these is that they have, by and large, not survived apart from in areas like the print media, where Founding Moguls have used the structure to entrench dynastic control. Quite why that industry was able to get away with it is a unclear to me, I just don' know enough about its historical structure - anyone else have a clue?)