Question

Recently several technology firms, including Facebook, Google, and Snapchat, have come under fire for issuing multiple classes of shares: some shares, held primarily by these companies' founders or management, with voting rights; and others, traded publicly, with reduced or no voting rights. Is this a corporate governance problem? Explain why or why not (in a manner that demonstrates understanding of corporate governance and employs vocabulary from Chapter 12). Would you still invest in these companies?

Answer 1

Corporate governance refers to the set of rules, guidelines and practices are used to govern the organization. A good corporate governance means the organization works with an objective to create value for different stakeholders, and takes initiatives that are morally right and socially just in the business environment. The organizational practices as a part of corporate governance, also works to expand the company and issue different types of securities. But, it is not a problem, because such decisions are taken in compliance with the guidelines prescribed by the regulatory bodies such as Securities & Exchange Commission (in USA) and respective stock exchange bodies. Accordingly, ordinary shares with or without voting rights, preference shares (having the nature of debt), rights issue and other types of shares are issued by these firms. Here, it is not the misuse of corporate governance, rather a planned initiative by the companies that are fully in compliance with the regulations and norms. Here, the firms issue such decisions to prevent the scope of any hostile takeover of the company by simply buying the shares in the capital market. Further, it is the investor who decides to invest after carefully reading the offer document. Hence, it is not a corporate governance problem. Rather, it is a strategic initiative to diversify the investor base.

Yes, I would like to invest in these companies, because of the following reasons:

1. These companies are operational in those business domains that are expanding on a higher growth trajectory.

2. Innovation driven approach of the companies that creates value for the shareholders

3. The market for these companies are growing in different continents.

So, investment in these companies is truly a rational decision based on financial information & performance.