The absence of shareholder voting rights in Snap Inc.'s recent IPO has large institutional investors and asset managers gearing up for a battle they hope will prevent a war from erupting among future corporate issuers.
“There is a line in the sand, and Snap crossed it. We don't want Snap to set a precedent,” said Aeisha Mastagni, portfolio manager with the $196.4 billion California State Teachers' Retirement System, West Sacramento. Anne Sheehan, CalSTRS' director of corporate governance, said that while CalSTRS and other large investors have been critical of dual-class shares elsewhere, the Snap IPO was the “spark that raised the discussion to a new level.”
The $3.4 billion March 2 initial public offering for the parent company of Snapchat — the disappearing photo, video and messaging app — made it the first U.S. company in recent history to go public with non-voting shares, with its two young co-founders retaining more than 90% of voting power.
Leading the charge against trimming or eliminating public shareholder voting rights is the Washington-based Council of Institutional Investors, representing $3 trillion in combined assets and 120 members, including CalSTRS, the $311 billion California Public Employees' Retirement System and other large public pension funds, plus 50 money manager associate members that manage more than $20 trillion in assets.
In a Feb. 3 letter to Snap Inc. co-founder and Chairman Michael Lynton, CII Executive Director Ken Bertsch and 18 CII members acknowledged that in recent years, “some young companies with dynamic leadership and promising products, like Snap, have attracted capital on public markets” despite having dual-class structures.
“However, the performance record of dual-class companies is decidedly mixed in the long run and even in the medium term,” the CII letter said. “Some companies lacking effective accountability to owners do soar for a time, but others crash and burn, and still others pursue mistaken strategies for far too long.”
Mr. Lynton responded, saying the structure, “which prolongs our ability to remain a founder-led company, will maximize our ability to create stockholder value.” Much of the company's success so far, he argued, “is due to the founders' leadership, creative vision and management abilities,” and the board structure calls for a majority of independent directors. While the offering is now in a quiet period, Mr. Lynton promised to meet later with CII to discuss corporate governance and stockholder engagement.