One share, one vote.
It’s a longstanding principle of investing in a publicly traded company that means that the number of shares an investor owns is equal to the number of votes he or she can cast on critical issues like mergers and acquisitions, board appointments and executive pay.
SpaceX’s entry in the stock market is the latest challenge to this principle, swelling the ranks of large and influential public companies that give shareholders little say in how they are run.
This month, SpaceX listed its shares on the Nasdaq with two tiers of stock: A-class shares, which are available to the public and carry one vote at the company’s annual general meeting; and B-class shares, which carry 10 times the voting power and are held by its founder and chief executive, Elon Musk, and a small group of insiders.
The arrangement means that even after Mr. Musk’s company sold more than $85 billion in shares in its record-setting initial public offering, he still maintains control.
It echoes similar moves by other founder-led technology behemoths like Alphabet, which went public in 2004, when the company was known as Google, and Meta, which went public in 2012 when it was called Facebook.
Mr. Musk owns about 40 percent of SpaceX shares but controls over 80 percent of the votes. Mark Zuckerberg, who founded Meta, owns about 13 percent of Meta shares but controls about 60 percent of votes. And Larry Page and Sergey Brin, the founders of Google, together own about 10 percent of Alphabet but control more than 50 percent of votes.
The sheer size of these companies means that these voting structures now carry enormous sway in the stock indexes used to benchmark millions of Americans’ retirement savings.
More than 15 percent of the S&P 500’s market value, or roughly $10 trillion, is accounted for by companies with unequal voting rights, according to data from Refinitiv. And that’s not including SpaceX, which is worth about $2 trillion in market value, since it is not yet eligible to join the index.
And more newly listed companies are choosing this structure. Last year, the share of I.P.O.s with unequal voting rights had risen to 20 percent, compared with 9 percent 20 years earlier, according to the analytics firm ISS-Corporate.
“Shareholders are the owners of the company, not the founder,” said Kyle Seeley, head of stewardship for the New York State Common Retirement Fund, the public employee pension plan, and board member of the Council of Institutional Investors, an advocacy group for shareholders. “You come to the market to get capital from the public, and they become the owners of the company.”
Many founders, he added, “do not see it that way at all.”
In May, the New York State retirement fund sent a letter to Mr. Musk and other top SpaceX executives, expressing its “serious concerns” with the company’s “novel and extreme governance structure and provisions.” They said SpaceX’s dual-class structure went further than other companies with multiple share classes did, even making Mr. Musk unfireable without his own consent.
SpaceX is incorporated in Texas, where the company is allowed to amend its bylaws such that shareholders must hold at least 3 percent of the company’s stock to establish legal standing to sue a board member on behalf of the company. At SpaceX’s current valuation, that’s tens of billions of dollars.
“It should be deeply concerning to any investors of this company, and it’s definitely for us,” Mr. Seeley said of SpaceX’s share structure.
Investors still retain one powerful form of influence — they can sell their shares and put pressure on the stock price. But realistically, it is difficult for investors to jettison companies that exert a large influence over financial markets, and over the indexes that fund managers are benchmarked to.
In the 20th century, the rule of “one share, one vote” became commonplace, according to Stephen Bainbridge, a law professor at University of California Los Angeles.
But media companies entering public markets opted for a different structure to balance the profit-maxing whims of their new shareholders against an assurance of editorial independence. Media organizations like The New York Times, Fox and News Corp all have multi-class share structures with unequal voting rights.
At times, shareholders at these companies have tried to challenge the dual class structure. But the structures have remained in place.
The Times and News Corp declined to comment. Fox did not respond to a request for comment.
In the early 2000s, Google emerged as the potential new arbiter of information in the world, as the power of traditional media became diluted by the internet. Taking a page out of those media companies’ playbook, the company, now known as Alphabet, went public with two share classes. Starting in 2014, it offered a third class under a new ticker, this one without any voting rights at all.
“The standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future,” the company wrote in a regulatory filing when it went public in 2004.
Google was a “watershed moment” for dual-class shares, said Valeriano Saucedo, associate director of ISS-Corporate. He said the success of the company’s public offering — and its astronomical share price rise since then — showed that investors were willing to make an important trade-off: betting on financial returns while giving up their voting rights.
After Google, other companies followed. In 2012, Meta went public with a dual-class structure. In 2017, Snap took it further and listed with only nonvoting shares for outside investors.
“That led other founders to say, ‘Look, we can do this. We can have our cake and eat it too,’” said Robert Bartlett, professor of law and business at Stanford University.
In 2017, S&P Dow Jones, which manages indexes like the S&P 500 and the Dow Jones industrial average, barred multi-class share companies from entering some of its indexes. But in 2023, it relented and relaxed its eligibility criteria to “remain timely and relevant.”
There are 44 companies with dual class structures in the S&P 500 today, according to Refinitiv. Many of these are traditional companies, like Ford Motor, Ralph Lauren or Mastercard, alongside the technology giants.
Groups like the Council of Institutional Investors have lobbied fiercely to stop the tilting shareholder voting landscape. Shareholder proposals to scrap dual-class shares at annual general meetings over the years have garnered significant support but have nonetheless failed, precisely because of the unequal voting structure.
“This is a race to the bottom of corporate governance,” said Mr. Seeley of the council.
Alphabet, SpaceX and Meta did not respond to a request for comment.
The post Investors in Public Companies Are Losing Their Voting Rights appeared first on New York Times.
