Google’s 2 Share Classes Benefit All

April 15, 2014

Companies do better when founders control the lion's share of corporate voting power.

Google's act of issuing a new class of nonvoting C-shares and thus preserving the founders' control of the company has generated a lot of heated arguments.

One thing is clear—this isn't an isolated incident. To the contrary, it's emerging as a trend among even the largest publicly traded companies. So much so that the S&P indexing committee is changing its methodology to accommodate these developments.

My colleague Paul Britt wrote an excellent blog on the subject of Google's new share class, lamenting that it had created what he cleverly called the "S&P 501 Index," as Google now has two share classes that are part of the benchmark.

I agree with Paul's points on corporate governance and shareholder representation in general that one share-one vote is a compelling ideal. But I also believe there are compelling reasons why founders who still run their companies should retain control of them for as long as possible.

To start with, let's take a look at the historical data. In 2004, there were 27 Fortune 500 companies that had a founder at the helm of the company who also had significant ownership control. The table below shows their market value in 2004, and again 10 years later.

Market Value in $MM
Company Name 1/01/2004 1/01/2014
Amazon 21,105 182,540
Apple 7,858 504,771
Berkley (W.R.) 2,917 5,860
Berkshire Hathaway 129,451 292,396
Capital One Financial 14,153 44,170
CarMax 3,205 10,501
Cardinal Health 16,02 33,520
Charles Schwab 16,062 33,520
Chesapeake Energy 2,940 18,051
Costco 17,024 52,336
Countrywide Financial 13,965 4,335
EchoStar Comm 6,476 26,450
FedEx 20,141 44,889
Genworth Financial 13,218 7,676
Kinder Morgan 9,191 35,315
Liberty Media 9,170 18,677
L-3 Communications 4,971 9,471
Limited Brands 9,316 17,954
News Corp 47,911 90,188
Oracle 69,161 172,071
Performance Food Group 1,657 1,250
Sanmina-SCI 6,518 1,407
Sonic Automotive 940 1,290
Sun Microsystems 14,602 5,700
Toll Brothers 2,905 6,559
Triad Hospitals 23,725 31,381
Whole Foods Market 4,050 21,521
Cap-Weighted Portfolio 509,111 1,663,091 327%
S&P 500 Index 1,112 1,663,091 166%

Source: Bloomberg

Notice that Google isn't included because it had just gone public and it was not a Fortune 500 company yet. But as an additional point of reference: Its shares have risen more than tenfold from its initial public offering price in 2004.

You'll also notice that there were a few bad apples in there—most importantly Countrywide Financial, whose founder Angelo Mozilo defrauded investors. The company was acquired by Bank of America in 2008.

Other companies that spiraled down and were ultimately acquired were Sun Microsystems (bought by Oracle) and Performance Foods (bought by a consortium led by BlackRock). I've used the purchase price that shareholders received as a final valuation in all three cases.

Despite some individual failures, the group of owner-controlled firms as a whole did quite well. If you had invested in a cap-weighted portfolio of these companies, you would have tripled your money over the period—beating the S&P 500 Index by a factor of 2.

What economic rational might lie behind this amazing outperformance?



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