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Michael Kinsley

Voting 'No' on Shareholder Democracy

By Michael Kinsley
Sunday, August 22, 2004; Page B07

Google, the Internet search engine company, went public on Thursday, and shares issued at $85 were soon trading at over $100. No one is forced to buy Google shares. People do it voluntarily, even downright eagerly.

This is so even though what they are buying are so-called Class A shares, which might more accurately be labeled second-class shares. First-class shares, mischievously called Class B, are held by the company's two founders and other high executives. In terms of dividends and so on, the two classes are identical. But Class B shares get 10 votes each, while Class A shares get only one. This means in effect that the company can raise money, and the founders can get fabulously rich, by selling stock to the public, but even with a tiny minority of the shares, the founders will control the company. And the public shareholders can't do anything about it.

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Google thus thumbs its nose at one of the major pieties of our day: shareholder democracy. This has been the high-minded response to Enron and the other corporate-looting scandals: Shareholders should have more say -- or, more precisely, some say, since now they basically have none -- about the management of their companies. That way, management couldn't so easily overpay itself or loot the company in more dramatic ways. The Securities and Exchange Commission is considering rules to make it easier for large institutional investors, at least, to challenge management nominees for boards of directors.

It's democracy. Who could be against it? Yet just this week, despite Enron, WorldCom and all, investors kicked and clawed to put money into a company that, in democratic terms, might as well be the old Soviet Union. Apparently they don't care. They want to be serfs. Are they nuts? Financial masochists?

Well, they think they're going to get rich, don't they? And, like the citizens of Singapore, they would rather be rich than free, at least in this narrow context. They cling to this view despite studies waved around by shareholder democracy enthusiasts showing that companies with some fundamental democratic reforms do better than companies without.

More important, and unlike the old Soviet Union, Google will let you leave anytime you want. You just sell your stock.

In their prospectus, Google's founders have some malarkey about how they are doing this dual-class business to prevent the company from being overly concerned with short-term profits and enable it to take the longer, ultimately more profitable, view. In other words, they think they know the shareholders' interests better than the shareholders themselves do. Shareholder democracy buffs are saying the same thing when they try to pressure, or even require, companies to make democratic reforms. But unlike Google, you can't free yourself of the SEC by simply calling your broker.

Another company with dual classes of stock is Berkshire Hathaway Inc., run by the legendary Warren Buffett. The last thing in the world that even second-class shareholders of Berkshire want is shareholder democracy. They're buying into Buffett's benign dictatorship, not into pro-rata shares of the wisdom of any idiot who buys in too. They're delighted to have no say in the company, as long as they are assured that other shareholders have no say either. That is far from nuts.

Or what about newspaper companies such as The Washington Post, the New York Times and Dow Jones, which publishes the Wall Street Journal? They have dual classes of stock and are blunt about the purpose: It is to retain family control. They say that this is to make sure that the newspaper survives and maintains the highest journalistic standards, even if this means giving up those last few drops of potential profit. You can believe them, or you can believe it's all about dynastic vanity. But these companies are being honest that they have goals other than maximizing profits, and the price of their shares will reflect the extent to which others wish to share in this enterprise. Why stop them, or even sneer at them?

Democracy is actually a second-best solution. If we're all going to McDonald's, and we all have to get the same thing, it should be decided by majority vote. But it's even better if we each can get what we want. And you can be fairly confident that a majority of McDonald's customers prefer hamburgers, while a majority at Popeye's prefer chicken. You don't have to require a vote.

Advocates of shareholder democracy believe it will lead to companies that care more for the environment, treat their workers better and so on. Well maybe, maybe not. In a world of perfect corporate democracy, in which large public companies are required to pursue only those goals that can be agreed upon by the owners of a majority of the publicly traded shares at any moment, the most likely result would be companies focused exclusively on maximizing profits.

Requiring shareholder democracy actually stifles it. Why shouldn't shareholder democracy include the right to decide whether you want shares in a company that practices shareholder democracy?

The writer is editorial and opinion editor of the Los Angeles Times.

© 2004 The Washington Post Company