The Lessons of LinkedIn's IPO Plans
LinkedIn is reportedly aiming for an an initial public offering that would value the company at more than $3 billion. But it is planning to adopt a governance structure that is absolutely hated by self-styled corporate governance advocates.
"The most controversial part of LinkedIn’s proposed governance is its use of dual-class stock. Shareholders who purchase stock in the LinkedIn initial public offering will receive Class A shares, which have only one vote apiece. LinkedIn’s current shareholders, including LinkedIn’s co-founder and chairman, Reid Hoffman, will hold Class B shares, which entitles them to 10 votes apiece," writes Steven Davidoff, the "Deal Professor" at the New York Times' DealBook.
Davidoff gives a good discussion of the litany of complaints against dual class stock companies. They make hostile takeovers virtually impossible. Some suspect the management holding the controlling shares tend to overpay themselves. Poorly performing management teams can cling to power, to the detriment of the company and shareholders.
But what Davidoff and the governance types don't see is that "good" corporate governance may be too costly for its alleged benefits. And government policy is constantly making it costlier. Consider, for instance, recently proposed changes in proxy access rules and "say on pay." These increase the ability of special interest groups, including union-controlled pension funds, to cut deals with management to the detriment of outside shareholders. Dual class companies may avoid this problem.
Similarly, dual class companies can better avoid the short term "beat the quarter" thinking that debilitates so much of corporate America.
Perhaps freedom from the need to be very responsive to immediate shareholder demands is something investors in diversified portfolios actually value.
This brings me to my last point: shouldn't diversified investment include diversification of corporate structure. If investors do not know in advance the optimal corporate structure—or if there is no such thing as an optimal corporate structure—owning stocks in companies with a variety of structures is advisable.
The experts might hate dual class companies. But when the IPO comes around, I suspect we'll discover that the market does not.
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