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2017-11-28 13:21:36
Facebook, Google, Alibaba et al offer lessons in the dark arts of corporate
control
THIS month Schumpeter visited the Barnes Foundation, a gallery in Philadelphia
full of paintings by Picasso, Matisse and Van Gogh. Albert Barnes, born in
1872, is notable for two things. He made a fortune from an antiseptic that
cured gonorrhoea. And he stipulated exactly how his art collection should be
posthumously displayed. The result is hundreds of paintings jammed together
nonsensically, often in poky rooms, and the creepy feeling of a tycoon
controlling you from the grave.
Barnes s string-pulling comes to mind when considering today s prominent
tycoons, who often hail from technology, e-commerce and media. At the moment
they seem omnipotent. But many founders are gradually cashing in shares in
their companies. The consequences will vary by firm, with some tycoons
gradually ceding control, and others clinging on to it.
A flurry of selling activity has been in evidence of late. On September 13th
Jack Ma and Joe Tsai, co-founders of Alibaba, a Chinese e-commerce behemoth,
said they planned to sell up to $4bn of stock by the end of 2018. Nine days
later Mark Zuckerberg said he would dispose of Facebook shares worth up to
$13bn by early 2019. Jeff Bezos has cashed in $2bn of Amazon stock this year.
Pony Ma, the boss of Tencent, a Chinese digital giant and no relation to Jack
intends to sell $5bn of its stock (although the timetable is unknown). The
transactions add up to a tenth of the total value of these founders holdings
in their companies.
More sales can be expected. Mr Tsai has just spent $1bn buying 49% of the
Brooklyn Nets, a basketball team. Mr Bezos needs $1bn a year for a space-rocket
project, and Mr Zuckerberg and Pony Ma harbour philanthropic ambitions. None of
the firms pay substantial dividends. They also pay their staff in stock,
diluting existing owners (and thus reinforcing the effect of founders share
sales).
To see the effect of stock disposals and dilution, consider eight founder-run
firms: Alibaba, Alphabet, Amazon, Facebook, Netflix, Tencent, Tesla and
SoftBank. The median economic stake of their founders is 13%. On the current
trajectory that will fall to 8% in half a decade; the tech tycoons might cash
out even faster.
Each firm has its own structure, reflecting how ruthless its founder was early
on and how much share capital it has raised, among other things. But there are
two main kinds of company: those run by control freaks, and those run by
control fanatics.
At control-freak firms, economic and voting power is aligned. As the founders
sell, their legal powers decline, too. Reed Hastings at Netflix is furthest
down this path. He has cut his stake from 7% in 2007 to 3% but dominates
Netflix by sheer force of personality. That is impressive but he is more
vulnerable as a result.
Amazon is also heading in this direction. Mr Bezos s economic and voting stake
has fallen from 25% in 2007 to 16%. At the present pace the top three
institutional investors will, together, be able to outvote him by late 2018.
Elon Musk owns 20% of Tesla s economic and voting rights, but his stake will
probably fall, too. His personal finances appear stretched he has taken out
loans secured against some of his shares. And Tesla needs to issue more equity
to fund its ambitious plans, which will dilute him. Such leaders are lionised
and it is hard to imagine their firms without them, as once it was difficult to
imagine Microsoft without Bill Gates. But over a decade they could shift to
institutional ownership. Apple and Microsoft have already made the leap.
The destiny of firms run by control fanatics, the second category, is murkier.
Their founders use dual classes of shares or other mechanisms to keep voting
rights even as they lower their economic exposure. Alphabet has three share
classes; Larry Page and Sergey Brin have an 11% economic stake but 51% of
voting rights. If they sell slugs of stock, as they have done in the past, they
could cut their economic stake to as low as 6% while keeping majority control.
Facebook s two share classes allow Mark Zuckerberg to have 51% of the votes
with 14% of its economic rights. This year he considered a scheme to
concentrate power in his hands still more, but abandoned it in September after
shareholders sued.
Asia s control fanatics use different levers. Masayoshi Son owns only 21% of
SoftBank s economic and voting rights. But he has set up an associated $100bn
investment vehicle, the Vision Fund , over which he seems to have near-total
control. Pony Ma owns 9% of Tencent s economic and voting rights, down from 13%
in 2007. Naspers, a South African media firm, has a stake over three times
bigger but has less influence. That is partly because Pony Ma has majority
stakes in Tencent s two key subsidiaries in mainland China, which he has agreed
to allow Tencent to run.
Alibaba has the most accomplished fanatics. Jack Ma and Mr Tsai have designed a
triple-lock system. A pact obliges other strategic shareholders to vote with
them. A majority of board seats must be appointed by the Alibaba Partnership ,
a club of senior staff whose permanent members are Jack Ma and Mr Tsai. Jack Ma
has a majority holding in several key subsidiaries in China, which Alibaba
operates. Alibaba s construct resembles the legal equivalent of a surrealist
painting (the government is probably the only body that could possibly wrest
away control).
Painting it black
The control fanatics are still relatively young and may hope to go on for as
long as Warren Buffett and Rupert Murdoch, who have used dual share classes to
keep control into their ninth decade. But today s corporate chieftains are
already pushing the limits. The gap between their economic stakes and voting
stakes is far larger than for Mr Buffett or Mr Murdoch now. And their firms are
among the most important in the world. When growth eventually slows and the
aura of genius fades, the tensions created by their concentration of power will
build. Albert Barnes s estate became mired in legal disputes and arguments.
Today s tycoons should visit his eccentric gallery for a reminder of the
pitfalls of seeking to hold on too tight, for too long.
This article appeared in the Business section of the print edition under the
headline "Control freaks"