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Reexamining dual-class stock

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  • Govindarajan, Vijay
  • Srivastava, Anup

Abstract

Snapchat’s initial public offering, which provided shares with no voting rights, is a culmination of the growing trend of dual-class shares. It contradicts the precept of one-share, one-vote that is essential for corporate democracy. Snapchat’s action caused an uproar among influential investors. In January 2017, a coalition of the world’s biggest money managers, which together control more than $17 trillion in assets, demanded a total ban on dual-class shares. We reason that the increasing prominence of dual-class stock is explained by the confluence of three economic trends: the growing importance of intangible investments, the rise of activist investors, and the decline of staggered boards and poison pills. A dual-class structure offers immunity against proxy contests initiated by short-term investors. It enables managers to ignore capital market pressures and to avoid myopic actions such as cutting research and development, which hurt companies in the long term. Thus, a dual-class structure is optimal in certain scenarios. We put forth alternatives to dual-class structure that enable managers to maintain control while retaining focus on sustainable value creation.

Suggested Citation

  • Govindarajan, Vijay & Srivastava, Anup, 2018. "Reexamining dual-class stock," Business Horizons, Elsevier, vol. 61(3), pages 461-466.
    • Handle: RePEc:eee:bushor:v:61:y:2018:i:3:p:461-466
    DOI: 10.1016/j.bushor.2018.01.012
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    References listed on IDEAS

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