Rupert Murdoch has yet again came under pressure from shareholders in News Corp, part of his media business, over what they see as the Australian mogul’s disproportionate control of the business. The Murdoch family own just 14% of the equity, but have nearly 40% of the voting rights.
Some shareholders criticised the acquisition of Murdoch’s daughter’s production company for £415m in 2011, and “succession planning that has focused on his children despite this being a public company”, among other issues. A vote to change the voting structure was narrowly defeated.
Families often like dual-class share structures because they are a way to keep control of a business while raising capital. At News Corp and Ford the families have “super-voting shares” which carry more weight than ordinary shares. Google, Facebook and LinkedIn have a similar structure. The Ford family owns just 4% of shares in the automaker that bears its name, but has 40% of voting rights.
But there are other ways to exert control. Samsung’s corporate structure is notorious: the founding Lee family owns just 1.5% of shares in the business but through a tangle of cross-holdings control 50% of the votes. Other firms let some shareholders appoint board members - this is the case at Alibaba. Fiat Chrysler, which recently listed in New York, has a structure that favours “long-term shareholders”, ie the family.
Families argue that such structures allow them to focus on the long term, and protect the business against opportunistic raiders. And while they might grumble about their lack of control, shareholders are often willing to settle for less power to get a share of the founder or family’s perceived brilliance or knowhow. (Do you know more about tech than Mark Zuckerberg, or the Chinese online shopping than Jack Ma?)
But not all these control structures are equal. A 2012 study by the Investor Responsibility Research Center Institute looked at companies in the S&P 1500 - an index which covers 90% of the market capitalisation of American stocks - with controlled shareholding. That is, either there is one class of shares but one party holds more than 30% of the business, or there is a multiple-class shareholder structure. In 2012, 114 firms fell into these categories.
Bizarrely, the study found that controlled firms with multiple share classes performed better over one year, but worse over a 10-year period, than the other types of firms, suggesting that the long-term benefit of these structures is a chimera. Controlled firms with a single share-class returned 14.26%, while those with a dual-class structure returned 7.52%. Volatility was also lower at controlled, single-class firms.
The implication is that founders with large stakes in their businesses do indeed help them outperform. Those who want to keep maximum control while raising maximum cash from the markets are not so good. Buyer beware.
And families who genuinely want long-term growth should be careful what they wish for.