Ride-hailing company Lyft is expected to start a roadshow this week to promote its initial public offering. As executives meet investors, they will be attempting to sell a structure that would grant Lyft’s two founders 20 votes per share compared to just one vote per share for everyone else.
Lyft will no doubt argue that its founders need such lopsided corporate governance to protect them from activist investors — firms like mine, which are accused of demanding short-term results at the expense of long-term growth. In fact, studies show that companies with dual-class structures tend to under-perform over the long term.
That is because shareholder accountability is often the best corrective for a company that has lost its way. In my experience, this is especially true in the technology sector, where enthusiasm for dual-class structures runs highest.
My firm, Elliott Management, frequently encounters technology companies where founders or longtime managers created remarkable innovations but then struggled with the challenges of maturing products, expanding organizations or slowing growth.
They often respond by aggressively seeking new sources of growth, paying richly for acquisitions that do not fit with their business models or allocating capital towards peripheral activities that fail to generate returns. Worse, such efforts often damage the core businesses that brought success in the first place.
This is how Elliott found Citrix in 2015. Citrix’s main business of providing virtual workspaces had stopped growing. Its talented engineers and salespeople were distracted by noncore products and unsuccessful deals. In the three years before we got involved, the company made eight noncore acquisitions and the stock sharply under-performed the Nasdaq Composite.
In 2015 Elliott acquired a 7 per cent stake, one of our partners joined the board, and we worked with the company to address its problems. The management team, supported by an engaged board, streamlined Citrix’s operations, separated out non core businesses, and refocused on its strengths.
Today, Citrix is investing in innovation and revenue is growing faster than it has since 2014. Employee satisfaction is higher, staff turnover is down and the share price has outperformed.
Many companies are able to pull off these transitions without active shareholder involvement. But even at the most successful tech groups, allegations of privacy violations and other abuses have been most acute at companies such as Facebook and Google where dual-class structures are in place.
Concerns about accountability are widespread. In fact, the battle against this second-class corporate citizenship is being led not by activist investors but rather the Council of Institutional Investors, whose members include well-known mutual fund managers, pension plans, foundations and endowments.
CII has asked US stock exchanges to require sunset provisions for all newly-listed companies with dual-class structures. Without time limits, investors of all stripes are rightly concerned that these structures will permanently limit their ability to hold chief executives of public companies to account for poor performance or bad behavior.
As a cautionary tale, consider Lyft’s rival Uber, which is also planning an IPO this year. In 2017, Uber, then private, had a dual-class structure in place when serious questions were raised about then-CEO Travis Kalanick’s behavior. The board, led by its early investors, lacked the votes to remove him so they turned to activist tactics. They wrote public letters, made the case for change and persuaded him to step aside.
Now imagine if Mr Kalanick’s limitations had surfaced after its IPO. Uber’s public shareholder base — dispersed, disorganized and lacking voting rights — would have struggled to act with the effectiveness of the private owners. And its dual-class structure would have made it more difficult for activists such as Elliott to bring about change. Uber now says it will float with a one vote per share policy.
Those with the insight and daring to found a business deserve our respect. But once they sell the vast majority of the company to the public, they should not be allowed to run it forever without any shareholder input. Public ownership must mean public accountability.