Google in stock split spat with governance geeks

13th April 2012

The new "C" shares will have no voting rights leaving Page and Brin immunised from effective criticism and relegating equity holders to a shut up or ship out option.

According to Reuters, the unexpected stock split has come at a time when some stockholders and analysts are questioning the direction of the company – in particular the planned decision to buy Motorola Mobility for $12.5bn, the group's first serious foray outside a world previously based on cloud computing. Motorola has hardware production facilities where Google is outside its comfort zone.

Search-advertising in decline

The stock split decision came as the group announced profits above expectations but warned that search-based advertising revenues had slipped. The first-quarter net income rose to $2.89 billion from $1.80 billion but Google revealed a 12 per cent drop in search advertising rates – the second consecutive quarterly decline. Google knows it faces a battle for web dominance with Facebook but it does not know the terms of the war or how it will be resolved.

The terms of the C share issue reinforce the control already enjoyed by the founders. Against a background of increased competition and the need to cope with newer devices such as smartphones and tablets, the board, dominated by Page and Brin, has effectively said "trust us as you have already trusted us" in moving forward.

Investors will get one share of the new "Class C" stock, for each existing Google share. And the new shares will be quoted separately.  More importantly, new acquisitions will be paid for in C shares as will new employee stock handouts. This will increase the value of the voting shares. Page and Brin already have a 56.7% control of the voting shares.

"I can't think of another example where a company created an additional class of shares and issued them to existing shareholders," said Bob McCormick, chief policy officer at Glass Lewis, an independent proxy advisor told Reuters. But he said the move simply perpetuated a system that shareholders had agreed to when Google went public eight years ago.

Founders explain Google philosophy

Google's founders felt the need to explain their further power consolidation. They said: "We recognise that some people, particularly those who opposed this structure at the start, won't support this change — and we understand that other companies have been very successful with more traditional governance models. But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users." This model has been picked up by other internet IPOs and planned IPOs including Facebook. 

"By investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me, and on our innovative approach," Page added.

But according to Bloomberg, the Page and Brin bid to hold onto power is "raising concerns among corporate-governance watchdogs." They say the new stock structure cuts shareholders further out of the loop by leaving the founders with as much, if not ultimately more, control.

More shares but tighter grip

"The latest move lets the founders issue stock to compensate workers or make acquisitions without loosening their grip. For investors, the result is a lack of input on decision making," Charles Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance told Bloomberg. "Shareholder voting rights are pretty limited in Google," he said. "And this basically perpetuates that reality."

"It's hard to tell why the additional step was necessary," said Tim Ghriskey, a co-founder of the Solaris Group which helps oversee about $2 billion in assets, including Google shares.

He acknowledges that if "investors aren't happy, they can always sell their shares." 

Google says it put in the original dual-class structure to insulate the company from outside pressures while it made potentially risky investments, such as the video-sharing site YouTube or the Android mobile operating system. And it will be almost inconceivable for the shareholders to vote down the proposal as those making it already have firm control.

Anti-best practice

Paul Hodgson, of GovernanceMetrics International Inc., a corporate governance firm in New York, said "the approach isn't ideal because it puts unnecessary limits on shareholders. That is anti-best practice as far as best governance, but so was the dual-class structure in the first IPO. There are plenty of companies that have a single class of shares, one vote per share, and they aren't paranoid that shareholders are going to somehow influence the future strategy of the company."

The search firm's founders have given up some voting power by selling stock over the past few years so the new structure would help prevent them from losing more.

With the two classes to be quoted on NASDAQ, it remains to be seen how investors will arbitrage between the two.  But it is likely that the non-voting stock will be more volatile – going up faster if the founders are in favour and sinking more quickly if ideas to move ahead such as the Motorola Mobility purchase turn sour.


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