Snap IPO signals trend: no investor votes
With Snap Inc. expected to start trading shares Thursday morning, shareholders are angling for a piece of a fastgrowing Internet company that says it is the future of cameras.
One thing that is falling out of the picture: the right to vote on that future. It’s the latest trend originating from Silicon Valley that could have shareholder democracy disappearing faster than a Snapchat message.
The Los Angeles company, maker of the popular mobile app Snapchat, plans to raise up to $3.4 billion by selling shares that carry no voting power to investors at $17 apiece. At that price, it will be worth more than $25 billion.
Snap’s no-voting regime is a more extreme version of a setup popular in big tech companies that gives founders and key investors tens or hundreds of times more voting power than ordinary shareholders, all but excluding them from important company decisions.
Founder-led tech firms have long had a difficult relationship with Wall Street. Companies like Facebook, Google and Tesla go public because they want money from investors to expand their companies and let employees and venture capitalists cash out their shares. But they don’t want outsiders telling them how to run their business.
Part of the motivation for Snap CEO Evan Spiegel may be his own experiences. Offering shareholders a vote may be standard — but, according to Spiegel, taking “standard” advice cost him plenty, giving an
early venture capitalist outsize control over future fundraising.
“When we were first getting started and took financing, our lawyers would take us through the documents and they’d say: ‘Oh, don’t worry about it. It’s all standard,’ ” Spiegel said at an Economic Times awards show in 2015. “I’ve since learned that standard means either the person who’s walking you through documents doesn’t understand them or you could be getting taken advantage of.”
In practical terms, giving shareholders a vote means handing your company’s fate over to proxy advisory firms like Institutional Shareholder Services and Glass Lewis. Mutual funds and pension funds, which manage trillions of dollars in assets, don’t have the resources or interest to closely follow all of their investments.
So they essentially outsource research and analysis on corporate governance to advisory services. Institutional Shareholder Services alone covers almost 40,000 annual meetings in 115 countries for 1,600 institutional clients.
Last year, institutional investors owned about 70 percent of all outstanding shares in the United States, according to a report by Broadridge and PwC. More importantly, 91 percent of institutional investors voted on proxy matters compared with just 28 percent for individual shareholders, the report said.
“In the end, the institutional investors still make the decisions,” said Hillary Sale, a law professor who specializes in corporate governance issues at Washington University in St. Louis. “It’s just like an individual hiring a financial adviser.”
Nevertheless, the proxy firms’ advice carries weight.
A study published in December in the Review of Financial Studies by researchers at Boston College and Baruch College suggests investors listen closely to proxy advisers on executive compensation. From 2010 to 2011, the study found a “no” from Institutional Shareholder Services led to a significant decline in investor support for a company’s pay practices.
Institutional Shareholder Services’ clout is “particularly strong in firms with large institutional ownership, firms where institutional ownership is more dispersed, and where a larger fraction of shares is held by institutions with small stakes or high turnover,” the study said.
That’s every Silicon Valley CEO’s nightmare: a bunch of investors who flit in and out of a stock looking to make a quick buck by demanding that management goose quarterly results. CEOs whose share structure lets them more or less ignore outsiders can make long-term investments or risky-seeming acquisitions — think of how Alphabet has poured money into self-driving car research, or how Facebook splashed out $19 billion to buy messaging startup WhatsApp in 2014, which at the time employed only 35 engineers.
Snap’s Spiegel has all of the leverage right now, said Adam Epstein, founder of Third Creek Advisors, which advises smaller public companies on corporate governance matters. There have been so few hot tech offerings in recent years that investors who want exposure to Internet growth stocks pretty much need to buy Snap, votes or no votes, he said.
Another trend has been for companies to issue relatively few shares, leaving most of the company in the hands of founders. LinkedIn is an example. The company offered less than 10 percent of its shares for sale in its 2011 offering. Public shareholders bought Class A shares, which had one-tenth the voting power of the Class B shares held by founder Reid Hoffman and other early backers. When Microsoft approached LinkedIn about a sale last year, Hoffman held all the cards, with 53 percent of the vote, despite owning just 11 percent of the company’s total shares. He said yes, the company was sold, and that was that.
Snap is selling more of the company — about 17 percent of outstanding shares. But those will carry zero votes. If Snap were approached by a buyer, Spiegel and co-founder Bobby Murphy would have the lone and final say; they will jointly control 88.8 percent of Snap’s voting power. Shareholders buying stock in Snap have to recognize that.
But Snap’s plan runs against the idea that shareholders (aided by proxy advisers) should have some say in how executives run their companies. At the very least, Snap’s IPO will test which institutional investors want to make a quick buck and which ones truly believe in sound corporate governance.
“Snap puts all of this into play,” Sale said.
Indeed, some institutional investors are reportedly lobbying stock exchanges to change listing rules that prevents the kind of nonvoting stock Snap is peddling.
Snap’s founders might not have had the ins and outs of proxy advisory firms in mind when they crafted their venture on the public markets. But the common theme here is control, and Spiegel doesn’t want to cede any of it to outsiders — whether or not they own stock.