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MULTI-CLASS STOCK AND THE MODERN CORPORATION: A VIEW 

FROM THE LEFT (COAST) ON GOVERNANCE MISALIGNMENTAND THE 

PUBLIC COMPANY

David J. Berger1

 1 Partner, Wilson Sonsini Goodrich & Rosati. The author would like to thank William 

B. Chandler III, Boris Feldman, Joe Grundfest, Scott Kupor, William Lafferty, Steven 

Davidoff Solomon, Larry Sonsini and the Hon. Leo E. Strine for their helpful 

comments on earlier drafts. Obviously all views expressed herein are solely those of 

the author and not of his firm or any other person. 
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I would like to thank Stephen Deane and the SEC for inviting me today, as 

well as Kurt Schacht and the other members of the Investor Advisory Committee for 

allowing me to speak on these important issues. I would also to thank my good 

friend and co-presenter Ken Bertsch, who invited me to discuss similar issues at 

CII’s meeting last year, and I am sure he (and the other speakers here today) will be 

much more eloquent and informative on these issues than I am.

For more than 25 years I have been advising Silicon Valley based companies 

on corporate governance issues. Given the general perception (especially on the 

east coast) of the corporate governance practices of Silicon Valley companies, you

may believe that I am simply Ron LaFlamme’s corporate governance partner2, or 

reading some of the reactions to Snap’s governance structure you may have already 

concluded that “Silicon Valley” and “good corporate governance” is an oxymoron. 

However I believe this is not the case—at least thus far no one has asked me 

to be on TV—and more importantly for our purposes I actually believe many Silicon 

Valley companies strive to meet the highest standards of corporate governance, and 

this applies even to many of those companies that have adopted multi-class stock 

structures. Indeed, I believe it is time to turn the notion of what is “good 

governance” on its head by asking a simple question: if you assume, as I do, that 

good governance is important to corporate success, why is the most dynamic sector 

of our economy—that is the tech sector, best represented by Silicon Valley—

 2 Ron LaFlamme is the corporate lawyer advising the fictional company Pied Piper 

in HBO’s Silicon Valley. 
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considered to have the poorest corporate governance? One could take this even 

further and ask why some of the most successful companies in the tech sector—

including Alphabet (formerly Google), Facebook, LinkedIn, Square and now Snap—

are also among the companies most criticized for their corporate governance 

structures?

To answer this question I believe one needs to understand the “Corporate 

Governance Misalignment,” that exists in our capital markets today, and that is the 

focus of my brief discussion. Specifically, changes in who owns stock as well as

governance rules (including the power dynamics supporting those rules) that focus 

exclusively on the needs of stockholders—and are especially favorable to the 

desires of short-term stockholders—have created a system that is increasingly 

rejected by technology companies precisely because such companies seek to be 

measured by more than just their stock price. This does not mean that stock price 

or shareholder value is unimportant; rather, the governance misalignment exists 

because we have reached a point where virtually all debates on corporate 

governance begin and end with what is best for public equity owners. This has led 

many companies and boards, especially in Silicon Valley, to consider alternative 

structures so that boards can adopt longer-term strategies, including perhaps 

sharing some corporate profits more broadly with employees and other 

constituencies. 

By understanding this governance misalignment, including how we got here, 

the current world we live in, and its effect on tech companies in particular, I think 

we can better understand why some of our most promising companies go public 
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with dual-class stock (or choose to stay private longer). Equally important, by 

recognizing the current corporate governance misalignment we may be able to start 

addressing the problems caused when corporations answer only to today’s 

stockholders without having to consider the impact of their actions on the human 

investors who actually provide the capital to these stockholders or the human 

capital that creates the value that grows the corporate enterprise, as well as the 

many other corporate stakeholders who contribute to the corporation and often 

take risks that are equal to or greater than stockholders who buy and sell shares in 

the public market, where the money used to purchase the shares typically does not 

go to the corporation and the greatest risk for the investor is a decline in the 

company’s stock price.

1. What Incentives Drive Today’s Investors?

As Commissioner Stein recently noted, today’s markets are dominated by 

institutional investors; in 2016 institutional investors owned 70% of public shares, 

and just three money managers held the largest stock position in 88% of the 

companies in the S&P 500.3 Thus when individuals do invest in the equity markets 

today they typically buy mutual funds or ETFs, not individual stocks.4 Most of this 

investment is in the form of retirement plans, and because many of these plans give

people limited choices over what funds to invest in (and these funds rarely if ever 

 3 See The Hon. Kara M. Stein, Commissioner, Securities and Exchange Commission, 

The Markets in 2017: What’s At Stake, (Feb. 24, 2017), 

https://www.sec.gov/news/speech/stein-sec-speaks-whats-at-stake.html. 4 See David J. Berger, In Search of Lost Time: What if Delaware Had Not Adopted 

Shareholder Primacy, in THE CORPORATE CONTRACT IN CHANGING TIMES (Steven 

Davidoff Solomon and Randall Thomas, eds., University of Chicago Press) 

(forthcoming 2017).
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give their investors any choice over what specific stocks the fund invests in), most 

individuals have very limited investment choices.5 Additionally, almost half of all 

Americans have nothing invested in the stock market—they do not own any 

individual stocks or mutual funds, do not have a pension plan, and do not have an 

IRAs or 401(k)—and thus have nothing at all invested, directly or indirectly, in the 

stock market.6

As a result, a majority of people—including both those who have nothing

invested in the stock market or who’s only investment is in various mutual funds or 

retirement plans—have no direct input into any of the corporate governance issues 

that are the focus of institutional investors today. This includes issues ranging from 

proxy fights to staggered boards to proxy access and even the questions of 

shareholder voting that are the subject of our meeting today. 

Given this reality, what incentives drive investors today? “Investors” today 

are, as Commissioner Stein noted, fund managers, not individuals. These managers, 

(whether they be hedge fund managers or money managers at institutional 

investment firms, and whether they call themselves “activists” “quants” or 

“owners”) invest the capital of others rather than taking the actual risks that comes 

with starting and operating a business. For these managers success is most-often 

measured by the fund’s short-term performance and growth. Because these money 

managers are incentivized to see stock prices increase they have sought to 

 5 See Leo E. Strine Jr., Who Bleeds When the Wolves Bite?: A Flesh and Blood 

Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, 

126 YALE L.J. 2, 49-52 (2017). 

6 Id. at 4. 
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incentivize senior corporate leadership—from management, to CEOs to corporate 

directors—to focus on stock price above all else.7

As a result, in today’s world the loudest voice that is heard on the issue of 

corporate governance is that of the equity owner. In contrast, all of the other 

corporate constituencies—including the voices of the vast majority of people who 

rely on the corporation for jobs, wages, benefits and long-term growth, as well as 

consumers who use the corporation’s products, communities where the corporation 

exists and others who rely on the corporation—have virtually no voice in corporate 

decisions even though these decisions may have a far greater impact on their lives 

than the fund manager who’s focus is simply on whether the company’s (or even the 

broader market’s) stock price increases or decreases. 

2. Governance Misalignment and the Demise of the Public Technology 

Company 

In addition to the market factors discussed above, existing legal principles 

contribute to the current governance misalignment. For example, Delaware law 

today is based upon the concept of stockholder primacy. As a result, directors 

 7 While these efforts have led to record stock prices, the costs in terms of decreased 

investments in employee and management training, lost jobs or harm to 

communities through plant closings or corporate participation in the community is 

typically not on the agenda of these investors as there is no incentive for money 

managers to focus on such issues. Indeed, what is striking is that most funds in a 

family—whether the particular fund is a “socially responsible” fund, an index fund 

or an actively managed fund—tend to vote identically on proxy issues, whether the 

issue involves governance or mergers, for the simple reason that most funds today 

either establish a centralized voting unit that develops voting policies across all 

funds or simply “outsources” its voting decisions to one of the major proxy advisory 

services. Id. at 50-54 (discussing voting systems at mutual funds). 
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cannot take actions to promote other corporate constituencies unless these actions 

ultimately maximize economic value for stockholders.8 

At the same time, Delaware law gives directors substantial discretion to take 

action in the long-term interests of shareholders, and even allows the corporation to 

adopt structural measures that would provide for longer planning cycles. However 

in recent years the increased power of institutional investors and activist hedge 

funds discussed above have led most companies to voluntarily eliminate the types of 

structural protections that are permitted under Delaware law, and further created a 

corporate governance system where directors and managers feel under substantial 

pressure to take actions that have the highest likelihood of raising stock price in the 

near term, even if these actions may harm the company in the long-term.9 

The short-term mentality of our public markets has impacted Silicon Valley. 

Technology has become the sector most frequently targeted by shareholder 

activists, and the financial characteristics that are most likely to attract activists—

including companies with large cash balances, substantial spending on R&D (which 

has the highest risk of failure or at least not showing near-term results) and high 

SG&A spending (which includes costs incurred on spending for employee and 

 8 Historically, a variety of countervailing forces often limited the ability of boards to 

act just in the interests of equity owners. This began changing in the 1980s, as the 

power of these countervailing forces declined. For a lengthier discussion of these 

issues, see generally Berger, Lost Time, supra n. 4. 

9 A recent study by McKinsey found that 79% of executives and directors felt 

substantial pressure to deliver results in two years or less, despite the fact that 86% 

of the participants said that using a longer time horizon to set strategy and make 

business decisions would have a positive effect on both financial returns and 

innovation. See Dominick Barton & Mark Weisman, Focusing Capital on the LongTerm, HARV. BUS.REV., Jan-Feb. 2014, https://hbr.org/2014/01/focusing-capital-onthe-long-term.
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manager training as well as employee benefits)—are all common to technology 

companies. Activists are also quick to target technology companies who may have 

missed a product cycle or technology transition, often with the encouragement of 

the institutional investors who hold the company’s shares, who frequently would 

rather sell the company and obtain the certainty of a premium for their stock than 

allow the company to invest and take the risks necessary to try and leap ahead. 

Given this environment, it should come as no surprise that in the last several 

years many successful tech companies have chosen to stay private longer (or leave 

the public markets entirely) rather than face a public market that has little tolerance 

for quarterly fluctuations or long-term investments in employee training or 

management skills10 or long-term projects that have a significant chance of failing. 

This has led to an historic low in IPOs, particularly those of smaller private 

companies (i.e. those with market capitalizations that are likely to be less than $1 

billion). As Marc Andresson has noted, “in the modern era, public market time 

horizons have never been shorter and private market time horizons have never 

been longer.”11

 10 Our accounting rules actually disfavor this type of spending, as unlike capital 

spending there is no line-item for it; instead, expenditures on employees, including 

training for employees and managers, is generally lumped into SG&A, and such 

spending is a prime target for activist investors. 

11 See Rolfe Winkler & Telis Demos, Tech Firms Are Notably Scarce in IPO Market, 

WALL ST. J. (Sept. 10, 2015), https://www.wsj.com/articles/ipo-parade-continueswithout-many-tech-companies-1441929152. For a more detailed discussion of 

these issues, see David J. Berger et al., Tenure Voting and the U.S. Public Company, 72 

BUS.LAW. ____(2017) (forthcoming).
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3. One Response to Governance Misalignment: The Multi-Class Stock 

Alternative

In the last decade several of the most high-profile technology companies 

have gone public with a multi-class share structure; Google (now Alphabet), which

had its IPO in 2004, is the company most frequently identified as beginning this 

“trend,”12 while Snap is the most recent example of such a structure.13 

The adoption of this structure was a response (at least in part) to several of 

the factors I have outlined above. As Google explained in its “founders letter” to 

prospective shareholders at the time of its IPO:

Google is not a conventional company. We do not intend to become 

one.... As a private company, we have concentrated on the long-term, and this 

has served us well. As a public company, we will do the same....If 

opportunities arise that might cause us to sacrifice short-term results but are 

in the best long-term interest of our shareholders, we will take those 

opportunities. 

Many companies are under pressure to keep their earnings in line 

with analysts’ forecasts...Google has had adequate cash to fund our business 

and has generated additional cash through operations. This gives us the 

flexibility to weather costs, benefit from opportunities and optimize our longterm earnings...Our long term focus does have risks. Markets may have 

 12 WSGR represented Google (now Alphabet) in its IPO, and continues to represent 

Alphabet.

13 While several prominent technology companies have gone public with a multiclass structure since 2004, including such companies as Box, Facebook, LinkedIn, 

GoPro, Square, Workday, and Zynga, such companies were a small fraction of the 

tech companies that went public during this same period. (Again, in full disclosure 

WSGR represented several of these companies in their IPO). At the same time, 

according to a recent CII study, the number of “controlled” companies declined from 

2012 to 2015, there are less than 100 companies in the S&P 1500 with dual-class 

stock, and most of those companies went public long before 2004. Historically dualclass structures were most popular among media companies, such as the New York 

Times and Dow Jones, not technology companies. Today, many non-tech companies, 

including Nike, Berkshire Hathaway, Comcast, Under Armor and others, have dualor multi-class stock. See generallyEdward Kamonjoh Investor Responsibility 

Research Center Institute, CONTROLLED COMPANIES IN THE STANDARD & POOR’S 1500, 

(2016).
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trouble evaluating long-term value, thus potentially reducing the value of our 

company. Our long-term focus may simply be the wrong business strategy. 

Competitors may be rewarded for short term tactics and grow stronger as a 

result. [Yet we] will not shy away from high-risk, high-reward projects 

because of short-term earnings pressure. 

We encourage our employees, in addition to their regular projects, to 

spend 20% of their time working on what they think will most benefit 

Google. This empowers them to be more creative and innovative. Many of our 

significant advances have happened in this manner. For example, AdSense 

for content and Google News were both prototyped in “20% time.” [While] 

[m]ost risky projects fizzle, often teaching us something. Others succeed and 

become attractive businesses. 

In the transition to public ownership we have set up a corporate 

structure that will make it harder for outside parties to take over or influence 

Google. We understand some investors do not favor dual class structures. 

Some may believe that our dual class structure will give us the ability to take 

actions that benefit us, but not Google’s shareholders as a whole. We have 

considered this point of view carefully, and we and the board have not made 

our decision lightly...we believe the stability afforded by the dual-class 

structure will enable us to retain our unique culture and continue to attract 

and retain talented people who are Google’s life blood.14

As this disclosure makes clear, Alphabet’s adoption of its dual-class structure 

was done at least in part in response to the governance misalignment I have 

outlined above. Specifically, Alphabet recognized the market pressures that existed 

at the time often led companies to avoid risk-taking and favor short-term projects 

over long-term investments. 

Since 2004 those pressures have only increased. The continuing growth of 

the professional money manager class, as individuals increasingly invest in mutual 

funds rather than individual stocks—what Delaware Chief Justice Strine has called 

 14 The full text of Google’s 2004 Founders’ IPO letter can be found here: 

https://abc.xyz/investor/founders-letters/2004/ipo-letter.html. 
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the “separation of capital from capital”15 –along with the corresponding governance 

movement to eliminate structural defenses and pressure to maximize stockholder 

value, has led companies who want to go public to consider how to withstand these 

pressures. 

As Alphabet’s disclosures make clear, there is no guarantee that the dualclass structure will succeed. As the CII’s own studies show, dual-class companies (as 

well as controlled companies) are more successful on some metrics and less 

successful on others.16 Yet what is most significant is that the key issues that impact 

the vast majority of actual human beings who are directly impacted by the 

corporation—including the development of new products or technology, the actions 

necessary to recruit and retain the best employees as well as providing the 

necessary training to allow these employees to excel, or even just creating good 

corporate citizenship—are all largely ignored by today’s narrow focus which gives 

the greatest influence over corporations to the professional investment class.

The use of multi-class stock by technology companies in recent years has 

been one response to the problem that the sole definition of “success” for the 

corporation is how well it performs for stockholders. Of course, companies that go 

public with multi-class structures remain a very small minority of companies, and 

given the relative novelty of this structure in the technology sector, it remains to be 

seen how well this structure will work for technology (or other) companies in the 

 15 See Leo E. Strine Jr., The Delaware Way: How We do Corporate Law and Some of the 

Challenges We (and Europe) Face, 30 DEL.J. CORP. L. 673, 688 (2006).

16 See generallyKamonjoh, supra note 11. (showing that, for example, “market 

capitalization rates of controlled firms was higher than that of the broader market 

index,” while underperforming on other shareholder metrics; no discussion of nonshareholder metrics)
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long-term. Further, multi-class stock has been the only alternative to the oneshare/one-vote structure, as other potential solutions to the problems discussed 

above, such as time-based voting, are discouraged by the existing regulatory 

system.17

Yet the leaders of many of our best technology companies will tell you that a 

corporation is more than its stockholders. More importantly, a governance system 

that focuses entirely on stockholders—especially when those stockholders are 

investing other people’s money and about half of the people in this country have 

nothing to invest—ignores the broader interests of the corporation (as well the 

people who rely on its success). 

Until this governance misalignment is fixed—until the broader mission of the 

corporate enterprise can be considered by directors and other corporate 

stakeholders have appropriate opportunities to enforce their rights along with 

stockholders—you will continue to have some of our most innovative corporations 

consider novel solutions to solve the governance misalignment problem, just as 

these companies are working to develop novel solutions to other problems that 

exist. 

 17 For a more extensive discussion of some of the issues involved with time-based 

voting, see David J. Berger et al., Tenure Voting and the U.S. Public Company, 72 BUS.

LAW. _____,(2017)(forthcoming).