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Are tech company IPOs re-writing the rules on governance?

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But not everyone is happy. Aside from concerns around a number of high valuations of fast-growing, loss-making (or marginally profitable) companies, there is also unease around governance in the tech sector, and just how much control future shareholders in tech companies will have.

This is a sector that has already rewritten large chunks of the corporate rule book over the last couple of decades. Now, founders want to retain control of their companies even after floatation, with IPOs accompanied by the requirement of special voting rights.
The principle of one share: one vote will no longer apply.

Google, which floated in 2004, was one of the first to adopt this type of voting, followed by Facebook, Linked-In, Yelp and others.

Alibaba executive chairman (and founder) Jack Ma plans to give company insiders the power to nominate the board – a concession agreed by the New York Stock Exchange regulators, but not by their counterparts in Hong Kong (hence the floatation in the US).
Alibaba’s group of 28 partners including Ma, senior executives and other insiders who together own only about ten per cent of the company, are aiming for a similar structure after floatation, as well as the ability to approve or reject all the directors. 

Ma obviously hopes this will prevent his company from becoming victim of investor short-termism and financial market pressures – something they clearly need to be mindful of in a fast-moving market that requires constant innovation and capital investments. It will also prevent an activist investor from taking greater control themselves by nominating their own directors or trying to impose short-term motivated changes in strategy; a growing concern in a number of companies in recent months.

The arrangement means that investors will have the comfort of getting the team who between them have built Alibaba up to its heady heights and who will continue to be in charge for the long term. For many investors, this is a huge deal. There is a lot riding on the vision, energy (and sometimes genius) of the founder, not least market confidence. 

Ben Silbermann, Pinterest’s CEO, gave some insight into the instinct and psyche of his fellow tech visionaries when he said: “The companies that I really admire the most are the ones that have a deep visceral understanding of why people use their service, and they figure out ways of making money that are completely consistent with how people are feeling and what they are doing at the time.” 

But despite these uncanny insights, is it good practice to have the governance of a company controlled by a small group of insiders when it puts other minority shareholders in a weak position, and less able to influence governance? 

In the end, of course it’s a case of caveat emptor; no one has to buy shares and if they don’t like the way the company is managed, well, they can always sell. As one fund manager said recently about Mike Ashley, a UK entrepreneur who has also proved controversial in terms of his governance practices: “ Yes, there are issues with governance, but Mike is a great entrepreneur, and that is what you are buying”.

Dr. Roger Barker is Director of Corporate Governance and Professional Standards at the Institute of Directors.

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