01 April 2022

ECGI: Dual Class Shares in the Age of Common Ownership

Dual class shares and the anticompetitive effects of common ownership are two of the most discussed corporate governance issues of our time. In this Article, we identify a hidden connection between them, which allows us to derive policy implications that are relevant for both.

The traditional debate on dual class shares is based on the trade-off between having visionary founders firmly in control of the firm and the risk that they extract private benefits of control. We show that the exclusive focus on this trade-off is rooted on the outdated assumption that all shareholders are firm-value-maximizing (FVM), that is, aim at maximizing the value of the firm in which they have invested. But, as the debate on common ownership acknowledges, diversified institutional investors à la BlackRock care about maximizing the value of their funds’ portfolios, irrespective of what happens to any individual investee company: they act as portfolio-value-maximizing (PVM) shareholders. Consequently, they might prefer a lower level of competition in product markets to maximize the joint value of the competitors that are in their portfolio.

In present-day financial markets, dominated by PVM institutional investors, dual class shares can then serve the additional purpose of allowing insiders to silence PVM shareholders, thus mitigating the anticompetitive effects of common ownership. For this reason, we argue against banning dual class shares, or even introducing a mandatory time-based sunset.

But that is not the end of the story. The ongoing climate crisis is showing that a relatively low number of major carbon emitters can impose gigantic externalities on the planet. The macroeconomics literature, in turn, has provided ample evidence that a subset of systemically important firms can affect the whole economy. Allowing these companies to have dual class shares without limitations grants FVM shareholders à la Zuckerberg the unfettered ability to inflict systemic harm on society. If limitations were imposed on such shares, PVM shareholders would internalize part of these externalities via their other portfolio holdings, and hence have the incentive to steer individual portfolio firms into being mindful of these externalities.

Thus, we suggest that there should be limits placed on the use of dual class shares by systemically relevant firms and show how such limitations ought to be tailored according to a firm’s specific ability to impose systemic externalities.

ECGI

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