Tech Need Not Be Anti-Democratic
Today, the Wall Street Journal published a long article about how Tech companies are working to fight off activist investors. The article is here. The most popular tactics – undercutting shareholder democracy by granting founders stock with super-rights – are being promoted by luminaries such as VC investor Marc Andreessen, who said in April
Public companies are being basically forced by pressure from activists and their investors to give back huge amounts of cash instead of investing it in their business
In other words, Mr Andreessen thinks that founders should have the right to control the companies that they founded even after they no longer own the majority of the company stock. Mr. Andreessen argues for a system in which the founder controls all stockholder votes, so the founder (as CEO) is answerable to the Board of Directors but the Board is only answerable to the founder. Where is appropriate corporate governance in that system?
I think that position is simply wrong-headed. As a venture capital investor myself, I love founders. Founders are the group of people who, more than anyone else, drive the value-creation miracle that is Silicon Valley. They have the vision, the drive and the obstinance to create products and companies that change the world. But the fact that a founder has successfully created a company does not make the founder infallible.
All too often, CEOs expect stockholders of a company – let’s remember that they are the true owners of the company – to passively support whatever management wants to do. Then, when an activist stockholder turns up with a clearly stated vision of how a company could be worth more for stockholders by doing something differently than the current strategy – whether by spinning off parts of the company, returning excess capital to stockholders, or whatever – the management somehow feels betrayed if stockholders side with the stated, reasonable strategy rather than with the unstated hidden one. They start looking for solutions like the ones promoted by Mr. Andreessen.
I believe that the real issue is not a problem with democratic corporate governance, but with the ability (or willingness) of CEOs to adequately communicate why their strategy is the best course for the company to follow.
The solution is not to give CEOs the power to strip stockholders of their traditional democratic voting rights. Instead, it is for them to convince the stockholders to support the management strategy. If management believes that it needs to keep a war chest of cash to fund acquisitions, it should say so as an argument against activists calling for a return of capital. If management believes that a company provides unique synergies by coordinating different lines of business, it should say so as an argument against activists calling for a spin-out. What management should NOT do, in my opinion, is avoid any discussion of strategy by stripping non-founder stockholders of rights.