Zuckerberg and other emperors.
“Presidents are not kings,” wrote Judge Ketanji Brown Jackson of the Federal District Court for the District of Columbia on November 25, in a 120-page decision in the ongoing fight between President Donald J. Trump and the House Democrats over whether current and former senior White House officials must comply with congressional subpoenas in the impeachment inquiry. “They do not have subjects, bound by loyalty or blood, whose destiny they are entitled to control,” Ms. Jackson wrote.
For that kind of power, Mr. Trump would have to turn the United States government into a major tech company. He would love that, since it would be just like the Trump Organization, except actually profitable.
In tech, chief executive-founders are often emperors of everything, with complete dominion over shareholders, employees, boards and their users across the planet.
And, unlike golf-course kingdoms with questionable profitability, tech companies have all the real power these days: as data monarchs, sovereigns of communications and lords of information.
No substantive laws govern tech. Most important, many leaders of these powerhouse companies are in effect unfireable: in order to get the boot, they essentially have to fire themselves.
Welcome to the world of perpetual dual-class stock, an old finance trick that has been used — and now abused — with great enthusiasm by the tech giants.
The car-sharing firm Lyft has it. Dropbox has it. Snap has it. Google’s parent company Alphabet has it. WeWork’s co-founder and chief executive had so much control of the company that investors were forced to pay him a king’s ransom to go away in preparation of an initial public offering (which was later abandoned). And, perhaps most important of all, Facebook has it.
In a dual-class stock structure, a company issues shares to some shareholders that give them more voting rights, and sometimes other powers. Most simply, the general public gets shares with less voting power, and sometimes with none at all. With perpetual dual-class stock, founders and their families, and perhaps other key executives, get shares with voting power that gives them control over a company forever.
Various versions of dual-class stocks have been around for a long time. The founders of the Ford Motor Company used them to protect their long-term vision. It has also been employed by family-owned media giants, like The New York Times Company, Viacom and News Corp, which arguably have mission-driven businesses.
But tech has taken the use of the dual-class stock organization to new heights. More than 50 percent of tech companies use it, and often from their very beginning as startups.
Founders have always been the golden children of Silicon Valley, despite their occasional tantrums. Protecting them has been a paramount concern, even if most venture capitalists say off the record that they hate giving total control over to them. But accepting dual-class structure is often the price of getting in on the next big thing.
It is easy to see the wisdom in this arrangement. Ideas need time to germinate and grow at the start of an innovative enterprise. And unpopular decisions by chief executives, made with the long term in mind, may need to be protected from interference from activist shareholders, who may be too focused on short-term performance.
Some academic research touts the benefits of dual-class stocks — although just as many studies show the drawbacks. Those include lower stock returns, higher executive compensation, more kooky acquisitions and, of course, management that never pays the price for bad calls or behavior.
Here is the problem with tech companies’ using dual-class stock schemes: They can work well until they do not.
I am not alone. Some experts have been calling for imposing new legislation to improve the system. One way to do that is mandatory sunsetting of dual-class stocks: After a period of time, the shares automatically convert to single class.
But how to be flexible about the time period — since some companies mature more quickly than others?
“The question is how long should it be before the C.E.O. is held accountable?” said Robert Jackson, a Securities
and Exchange commissioner. Mr. Jackson thinks we should start by saying “not forever.”
“We’re creating a class of royalty that controls our national dialogue,” he said. “Not only can you not fire Mark Zuckerberg, you can’t fire his kids or his kid’s kids.”
Mark Zuckerberg’s kid’s kids? While that seems unlikely, it is why dual-class stock that never ends has been under attack — sometimes from powerful investor groups.
The Investor Stewardship Group and The Council of Institutional Investors, with billions in assets, have been calling for the limiting of dual-class stock after seven years. C.I.I. and other big investors filed a petition to do just that a year ago to the New York Stock Exchange and Nasdaq.
“The petition’s over a year old,” Mr. Jackson said. “What do you think’s happened so far? Nothing.”
In other words, long live the kings.