How Shareholders Lost Control Over Corporations, Case Study Example

Even though shareholders technically own parts of the corporations they own stock in, it is important to consider that the management team traditionally owns a larger portion of the stock, indicating that their vote contributes to a greater portion of company decisions. In other cases, dual-class structures exist that create two types of stock; the holders of one type has the power to make executive decisions for the company and the other, for general members of the public, allows these individuals to benefit from their investments in terms of dividends and the ability to sell shares at a profit (The Economist). This trend is generally seen as permissible in the New York Stock Exchange. However, it is important to consider how shareholders lost their control over corporations.

Practices at Google follow the dual-class structure deal. Under their plan, shareholders with Class A stock are entitled to one vote per share, while individuals with Class B stock are entitled to ten votes per share (Summers). This makes the shares that Class A stockholders own generally valueless due to the large number of shares that Class B stockholders have in their control. To further reduce the rights of shareholders, Google recently implemented a “Class C” shareholding option that is associated with no voting rights whatsoever. To make matters worse, these shares only trade for $1 less than other share types, indicating that there is no advantage in having this type of share. Under Armour Inc. has reportedly followed Google’s lead and issued Class C stock associated with no voting privileges (Ogg). Critics of Google’s and Under Armour’s plans are worried about the lack of checks and balances in place that will allow shareholders to provide these organizations with feedback about their plans.

While the development of “Class C” stock is a modern example of how shareholders have lost control over corporations, shareholders have generally been seen as a potential interference with decisions made by the company throughout business history. Therefore, stock was sold to help provide investment for these organizations, but the owners of these organization still wished to maintain control. They did so by ensuring that the controlling body of the company held a majority of shares to make sure that the votes of shareholders could not contribute to a high level of damage for the company’s plans. Today, organizations are expanding their power by finding ways to gain the investments from stock without needing to risk loss based on the votes of shareholders. Over the years, these practices have become used more frequently by corporations so they will be able to maintain control.

Since the executive board of corporations are responsible for making decisions that pertain to the power of shareholders, the rights of shareholders have been reduced significantly over the years. When Wall Street opened on May 17, 1792, companies participated in the Buttonwood Agreement because they thought that the stock market would be a beneficial way to raise funds for their companies. However, there was already a concern about the ability for shareholders to gain control over the organization. As a consequence, the executive board members founded the practice of retaining stock for enhanced voting rights. According to both historical and modern practices, it is important for individuals that wish to invest in stock to pay attention to the corporations that are becoming involved in these trends and make sound decisions about their investments with this knowledge.

In addition to the Class C stock currently being issued by Google and Under Armour, Facebook is currently opposing the “one share one vote” standard (Bloxham). This is understandably angering shareholders of these companies and the shareholders are putting forth measures to return this clause. Corporations counter this belief by stating that most shareholders are short-term investors and they are worried that they will make decisions that are biased towards achievement of their short-term goals. Furthermore, mutual funds and investment companies are also concerned with shareholder voting rights and are threatening to discontinue investing in organizations that enact the selling of Class C shares.

From the cases of Google, Under Armour, and Facebook, it is apparent that incumbent management is enacting governance changes that do not necessarily benefit the shareholder. In the modern sense, this means implementing Class C shares to completely prevent the voice of the shareholder from impacting company decisions. Historically, this meant the incumbent management holding control over a percent majority of the stocks. Independently of how shareholder voice is limited in practice, the executive boards of corporations have been attempting to silence these individuals since the inception of stocks. Since investors have short-term goals and the executive board wishes to implement long-term decisions to benefit the company, there is an intrinsic conflict of interest between the two groups. However, this is not resolved by reducing the power of shareholders. As investment firms demonstrate, large investment groups have the power to retaliate against companies for these decisions by contributing less to stocks that have Class C options. Therefore, it will be interesting to determine how this power struggle results.

Works Cited

Bloxham, E. Facebook and Google investors prepare to fight for their say. 1 June 2015. Web. 1 September 2015.

Ogg, J.C. Under Armour Stock Split Verdict: Same as the Google Power Grab. 16 June 2015. 1 September 2015.

Summers, N. Google Shareholder Votes Can Be Worth Less Than Zero. 3 April 2014. Web. 1 September 2014.

The Economist. Out of Control. 20 September 14 2015. Web. 1 September 2015.