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Elon Musk may be the face of Tesla (TSLA) Obfuscating his own reputation and brand identity. But while this man has close ties to the company and its $700 billion valuation, there’s one thing he doesn’t have that his peers in the technology industry enjoy. It’s more control.
Last week, Musk publicly asked Tesla’s board to increase his stake to 25%, giving him even more influence over the company, or he would continue developing artificial intelligence technology elsewhere. said.
Musk, the world’s richest man, was quick to point out that this is not about money. Rather, he wanted greater decision-making power. In fact, he has even floated the idea of receiving a different type of stock that would give him more voting rights without diluting his existing Tesla stock or forcing the company to pay him billions in additional compensation. surfaced.
The dual-class share model is the one enjoyed by Musk’s frequent rival, META CEO Mark Zuckerberg, who controls his company through super-voting shares. Mr. Musk seems to want what Mr. Zuckerberg has. But this arrangement shows the limits of unchecked executive control and its double-edged nature in creating unequal voting rights.
Historically, companies have adopted dual class structures in certain sectors, including so-called unscrupulous industries such as alcohol and tobacco, to prevent corruption. Also, most prominently, there were situations in which families competed for control of inheritances over the whims of short-term interests. In publicly traded newspapers such as the New York Times (NYT).
However, in recent decades, young companies have increasingly adopted this structure.
Overvoting systems have grown based on the belief that the success of early-stage companies is tied to the founders themselves, and that their vision, drive, and leadership are intrinsic to the company’s value. The tendency of startups to rely heavily on equity-based compensation is another reason proponents of dual-class structures use it. Because managers and their employees are also major shareholders, managers’ incentives are aligned with rising stock prices, keeping employees motivated and committed to accumulating wealth for their own benefit. Masu. For dual-class backers, this setup allows reps access to more funds without diluting their influence while maintaining an optimal environment for making strategic decisions.
Data compiled by Jay Ritter, a finance professor at the University of Florida, shows that tech IPOs using dual-class stocks are on the rise. Over the past decade, the proportion of tech IPOs with dual-class structures averaged about 36%, up from about 22% in the previous decade, according to the data.
“Investors are relatively comfortable with dual-class stocks in tech companies because public market investors, on average, have performed well in the U.S.,” Ritter said, adding that investors like Meta, Alphabet (GOOG, GOOGL) and other notable dual-class examples. The stock price has more than doubled in recent years. From 1980 to 2020, companies that used dual-class stocks outperformed single-class stocks, with returns of about 30% and 19%, respectively, according to Ritter’s data. IPO.
However, success stories can turn around on their own. By supporting shareholder-managers who hold a majority of voting shares, companies have weaker organizational checks on executive power. When stock prices are rising, a less constrained leader can be a good thing. But when the outlook worsens, investors relegated to a voting minority have little recourse to course-correct.
Jun Frank, managing director of ISS-Corporate, said the main criticism of dual-class shares is that they relegate shareholders to second-class status. Founders and insiders can maintain significant control with much less capital. And this structure reduces the level of influence the public has over companies, he said.
Financial arrangements that give executives significant power may also come under scrutiny. Part of WeWork’s spectacular IPO blowout in 2019 had to do with corporate governance issues and multi-class stock that gave then-executive Adam Neumann significant voting influence. Ride-hailing giant Uber has scrapped its super-voting stock structure following a widely publicized scandal and the eventual firing of former CEO and co-founder Travis Kalanick in 2017. .
The long-term risks of having significant decision-making power in the hands of founders and early investors are also recognized among companies using dual-class shares. Many such companies rely on sunset clauses that phase out multiple classes of stock when certain triggering conditions are met, typically when the founder leaves the company. In 2023, about 52% of Russell 3000 companies with dual-class structures also had sunset clauses, according to ISS-Corporate data. This is up from 44% in 2021.
But the way Musk sees Tesla’s current structure, a relatively weak executive could pose other dangers.
His stake in the company puts the automaker at risk of a takeover with “dubious benefits.” he said this in x. But a larger number of shares would give them enough power to protect the company while still providing a check on their power. “If I have 25%, it means I have influence, but if twice as many shareholders vote against me as against me, that influence could be nullified. “There is a gender,” he said.
Despite the amount of control he already has, there’s still room to do more.
Hamza Shaban is a reporter for Yahoo Finance, covering markets and economics. Follow Hamza on Twitter @hshaban.
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