What is Dual-Class Stock?
How Does Dual-Class Stock Work?
Companies can have several classes of shares. For example, let's assume Company XYZ has Class A shares and Class B shares. Company XYZ issues the Class A shares to the company founders and top executives. It issues the Class B shares to the public in an initial public offering. If the Class A shares carry ten votes each, but the Class B shares carry only one vote each, then each Class A shareholders carries ten times more power than the Class B shareholders (assuming the same number of shares are owned). Usually this disparity is intentional. In this case, the Company XYZ managers and founders may want to retain majority control of the company and also take advantage of the capital provided by an IPO.
Well-known companies that have or had dual-class stock include Ford, Tyson, Cablevision, Hewlett Packard, Berkshire Hathaway, Viacom, and Hollinger International.
Why Does Dual-Class Stock Matter?
Dual-class stock is controversial, and there are conflicting academic studies associating financial performance and the existence of a dual-class structure. Supporters of the system say that the presence of controlling, unlisted stock somewhat counters any short-term financial focus investors may have. This is because the founders or other investors who hold the controlling shares often see past quarterly earnings.
However, many shareholders see dual-class stock as an unfair system that allows a small group of shareholders to retain control while other shareholders provide a majority of the capital. Critics say that although it is good for managers to have ownership in the companies they work for, the disproportionate power offered by a dual-class system is unsavory since managers face fewer consequences for bad decisions and are less motivated to raise additional capital that might weaken their influence.
Efforts to change a dual-class system to a single-class system are difficult because the controlling class of stock can vote no. Efforts to alter executive compensation, mergers, board structure, or other sensitive issues are also harder in a dual-class system.