Dual-class stock structures like the one Lyft is contemplating for its IPO invite abuse.
What does it mean for a company’s leaders to be accountable? It’s a question worth thinking about as Lyft, the ride-hailing startup, prepares to go public with an ownership structure that’s both controversial and increasingly the norm for high-growth tech firms.
Lyft’s two co-founders, Logan Green and John Zimmer, together own less than 10 percent of the equity in their company. In a public offering expected sometime this year, they are reportedly planning to create two classes of shares, issuing themselves so-called supervoting shares that will give them effective control over all decisions, including whether they keep their jobs. In an email to Inc., Lyft declined to comment on its plans.
For founders who want to tap public capital markets without prostrating themselves before the masses, the two-tier structure is a popular tool, one that, until recently, carried little or no cost. The founders of Alphabet, Facebook, and Snap all hold supervoting shares that insulate them from market pressures, and Airbnb and Slack are expected to adopt similar structures when they go public, likely this year.
But the atmosphere in which Lyft prepares its IPO is very different from the one that awaited Google in 2004, Facebook in 2012, or even Snap just two years ago. With questions about Big Tech’s outsize influence on politics and the economy dominating headlines week after week, Silicon Valley princelings can’t consolidate power for life without at least answering some thorny questions. That goes doubly so for Lyft, which, by positioning itself as ridesharing’s good-guy player, took advantage of Uber’s public relations crisis under its former CEO, Travis Kalanick, to pry away market share. It was Kalanick’s grip on board seats wielding supervoting shares that kept him in the job long enough to do the damage Lyft adeptly exploited.
Reporting on the plan by Lyft’s founders to make themselves similarly hard to fire, WSJ notes,
The issue has taken on increased import after Facebook and other companies with extra control for founders stumbled lately. In Facebook’s case, the company has come under increasing scrutiny for how it uses customers’ personal information and the influence it wields as gatekeeper to one of the world’s largest places to advertise online. Though it has rebounded recently, Facebook stock took a sharp hit after negative headlines led to questions about Chief Executive Mark Zuckerberg’s leadership and his controlling stake in the company.
In 2017, Snap, whose two co-founders control about 90% of its voting power, sold shares to the public with no voting rights. Snap’s stock and its business have struggled since then. The shares are down nearly 50% and the company has suffered an exodus of senior executives.
As that passage suggests, discussions of two-tier stock structures tend to conflate two lines of criticism. One has to do with corporate responsibility: CEOs like Zuckerberg and Kalanick who command voting majorities have an easier time surviving transgressions like violating users’ privacy or tolerating sexual harassment. The other one is financial: CEOs who think they can’t be fired are apt to ignore feedback from investors about how they deploy assets.
These are very different concerns. At some point, of course, an ethical scandal that spirals far enough out of control will destroy shareholder value, as both Uber and Facebook have experienced at times (if temporarily). But the people who want corporations to be more accountable for their impact on stakeholders who aren’t shareholders–users, employees, immigrants, whoever–don’t think that accountability should be conditional on how the business is performing.
The proponents of two-tier structures argue they aren’t seeking that kind of immunity. Among founders, the argument is, rather, that not having to worry about job security frees up a CEO to invest in initiatives that might pay off on the scale of years rather than quarters. It’s a solid argument. After all, if public markets fully grokked the relationship between high cash burn and high growth potential, the entire venture capital industry would be out of a job.
Is there a way to disentangle these two strands–to shield public company leaders from Wall Street’s short-termism while maintaining the ability to oust them for failings that have nothing to do with making bold bets or building long-term value?
Turning over that question, my mind went to the Long-Term Stock Exchange, a project spearheaded by Lean Startup author Eric Ries. The idea is to create a new exchange for companies willing to commit to a novel form of governance, one meant to incentivize long-term thinking on the part of both executives and shareholders. To align investors and leadership around durable value generation, LTSE-listed companies would adopt “tenure voting,” in which the voting power of shares grows the longer they are held.
“Today you basically have two choices,” Ries said when he explained the LTSE concept to me in 2017. “You can have a CEO who’s an unlimited-power emperor for life. Or you can have a system where, if I come to the country on a tourist visa, I can vote for president, go home tomorrow, and my vote counts.” In other words, a share held by a day trader flipping stocks off the headlines has the same voting power as one held untouched in an index fund portfolio for 30 years. “No one in political science would advocate for that,” he says.
Insulating CEOs from accountability too much has drawbacks beyond the obvious ones. Getting buy-in from multiple constituencies is a way of sharing responsibility for big decisions. When everything happens on the CEO’s say-so, “I think the pressure that puts on the individual person is not actually doing anyone any favors,” Ries said.
Moreover, while a billionaire founder may be free to operate with perfect job security and utter financial independence, there are other people whose actions matter. “You’ve got thousands of managers with short-term stock options who are still reading the ticker,” he says. “Something that only affects the CEO is not as good as something that can affect all the stakeholders.”
Right now, the LTSE is still more an idea than anything. In November, the company applied to the Securities and Exchange Commission for registration as a national exchange. If it’s really the freedom to invest in the future, not absolute power, that draws so many Silicon Valley founders toward two-tier stock structures, the LTSE should have some blue-chip customers waiting for it, whenever it opens for business.
Until then, the question remains: Do we want companies to be innovative or responsible?