Anecdotal Evidence for Dual Class Share Performance

        The initial public offering (IPO) of Snapchat did not include voting rights for its shares. The offer in the early 2017 gave the CEO of the company, Evan Spiegel a positive profile in the mainstream media because the move was an enigmatic and genius because it could revolutionize the stock market. The move by Snapchat culminated into a growing trend of dual class shares. Nevertheless, about a year later, the company has been recording huge losses, slowed growth, and its stock falling by approximately 50% of its IPO price (Meager n.p.). The failed venture brought the reputation of Spiegel down to the mud because of his direct connection to the company’s failure. Nevertheless, there is no legal or professional mechanism to hold the CEO responsible because the idea of offering dual-class shares without voting rights was bought by other key stakeholders (Govindarajan 461). The rise of dual-class corporates was founded by Snapchat through its much-hyped IPO, which were offered without voting rights. The offer was unique in that it contradicted the conventional theories regarding shares and offerings (Govindarajan 462). For instance, the approach violated the concept of John Whitehead, the former chairperson of Goldman Sachs that shares offered with no voting rights destruct the basis of capitalism. Snapchat borrowed the concept of dual-class share from companies such as Nike, Ford and New York Times among others that have operated dual class stock for more than a decade. However, Snapchat adopted the idea to an extreme end through the inclusion of zero voting rights to the publicly offered shares (Meager n.p.). The failures of Snapchat’s dual class shares can be attributed to the fact that majority of the institutional investors have persistently objected to shares with lesser voting rights.

        Consequently, the zero-voting offering of shares by Snapchat caused a pandemonium among the influential investors in the stock market. The announcement of the new dual-class strategy by Snapchat in the early 2017 was met by a significant opposition. A group of the biggest stock investors in the world came together during the same period to push for the dual-class share ban (Meager n.p.). The main argument behind the burn is that the dual-class shares will provide immunity against proxy competition started by short term investors. According to the Bloomberg’s findings, Snapchat used the dual-class offers as a tool intended to help in molding Spiegel into one of the most competent CEOs. Based on the negative feedback from employees regarding his management approach, Spiegel wanted to use the dual-class shares in order to put his ineffective past behind (Govindarajan 463). By offering IPOs without voting rights, the Snapchat’s CEO was trying to be more an open and communicative manager. As a normal multinational company, the failure of a CEO was inevitable with a 50% decline in its stock and severe punishment of the employee. Nevertheless, the dual-class shares structure adopted by Snapchat made it a unique company (Sharfman n.p). It approaches approach to this new stock venture means that public shareholders do not have any slight authority regarding the management of the corporate. Instead, the two core founders, Spiegel and Murphy remains the controller of the 96 % of the company’s voting rights. The move is seen by stock investors as a threat to their stake in the firm in the event of wrong decision-making strategies. Lack of voting rights by the shareholders was made clear by Snapchat and confirmed that the firms’ executive have 96% of the rights (Meager n.p). Once the management approach was adopted, the traditional board meetings would be unnecessary.

        The relationship between the company and its investors after initiating the dual-class shares offered without rights was that the firm cared less about the investors. At first, the shareholders tolerated the dual-class structure hoping that Spiegel’s strategy would revolutionize the stock market (Sharfman n.p). The belief was pegged on Zuckerberg’s success because Spiegel also started at a young age. However, this was unrealistic imagination because Zuckerberg’s competence could not be compared by Spiegel’s dictatorial leadership approach that ran Snapchat down.  Snapchat is losing millions of dollars annually. Furthermore, its growth has significantly slowed because Facebook has co-opted some of its best features (Govindarajan 464). Since Facebook is its key competitor in the social media industry, Snapchat’s dual-share approach could not see the light. It could be difficult to attract investor into the company only to have not rights over their shares while there are prominent and promising companies such as Facebook, Twitter and Alphabet among others (Meager n.p.). One of the key evidence showing the dual-class shares structure Spiegel introduced into the company is that Snapchat trails its key competitor such as Facebook with a gross margin of 85%, Twitter with 67%, Alphabet with 57%, GoPro with 39% and Snap Inc. with 20% of gross margin during the 2017 FY (Meager n.p.). Even though with the decline in its stock prices, some investors are still buying the shares with the hope that Snapchat will grow to the current status of Facebook and Twitter in terms of their gross margins. The key problem is that Snapchat is not the only firm that recently offered IPO, which prevents the public shareholders from the voting rights. Various companies such as Domo, GreenSky and Dropbox among other have already offered IPOs with dual-class structures. The corporations that are conglomerate and huge IT companies usually have dual class structure (Sharfman n.p). This causes the companies to implement dual dividend policy in most of them.

Trend Regulations of Dual Class Share Performance

        The regulations for the trend regarding the firms in the stock market going public or adopting the dual class share have introduced moderations. Currently, there is an increasing trend for companies to adopt a dual class share, which indicates that many firm managers tend to like the dual class stock structure (Bebchuk & Kastiel, 2017)[30]. However, the set regulations for the stock market are causing significant effects on the stated trend. Considering the United States and the European stock market, it is notable that there is an increasing trend towards unifying the dual class stock structure (Li, Wu & Zhou, 2018)[31]. Consequently, trend initiates the entrenchment of many executives and has a significant contribution to the erosion of the voting rights of shareholders. The first finding presented reveals a gradual rising trend in dual class stock structure from 1990 to 1993. The finding states that eleven firms use the dual class stock structure to raise capital. Also, the finding states that the number of firms using the dual class share increased over the last eight years, which is from 1994 to 2002.
The idea of the dual class stock structure has initiated intense debate and controversies. The controversies are the foundation of the regulations, which are targeted to moderate the effects of the companies adopting the dual class stock structure. One of the critical issues surrounding the dual class stock structure is its tendency to create corporate loyalty due to limited voting rights it grants the shareholders (Bebchuk & Kastiel, 2017)[30]. The regulations protect the voting rights of shareholders in firms that employ the dual class stock structure. Also, the regulations control the competition in the stock market and the trend of companies shifting to dual class stock structures. Another duty of the regulations is the control of the desire of companies to attract IPOs (Govindarajan & Srivastava, 2018)[18]. Lastly, the regulations are intended to make the market attractive to the founders of the companies.

References of Dual Class Share Performance

 Govindarajan, V., & Srivastava, A. (2018). Reexamining dual-class stock. Business Horizons, 61(3), 461-466. doi: 10.1016/j.bushor.2018.01.012