Are Dual-Class Shares Having a Negative Effect on Boards?

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Is the use of dual-class share structures beginning to have a negative effect on the board’s ability to practice good governance? The question has become notable because of the IPO of WeWork.
WeWork Founder Adam Neumann Photo:

Is the use of dual-class share structures beginning to have a negative effect on the board’s ability to practice good governance?

That’s a question corporate directors may need to consider after news reports suggest the upcoming initial public offering of WeWork would grant its founders powers that some feel go beyond the norms of corporate governance.

Considered one of the high-profile IPOs of 2019, WeWork is following in the footsteps of other so-called “unicorn” tech companies by using a dual-class share structure which gives its founders much greater voting control over the company. WeWork’s parent company, The We Company, released its IPO filing for the workspace solutions company last week. A report from Reuters detailed some potential governance-related concerns contained in the filing, including:

• WeWork founder Adam Neumann’s wife and co-founder Rebekah Neumann has the right to select who would replace Adam as CEO should he die or become permanently disabled in the 10 years after the IPO. That selection would be made with the help of board members Bruce Dunlevie and Steven Langman unless they step down from the board, in which case, Rebekah would select two other board members to assist.

• Voting control of some shares of the company is linked to the Neumann’s donating $1 billion to charities over the next 10 years.

• The company is launching with a seven-member all-male board.

Experts have expressed concern that with these provisions in effect, governance at WeWork might face some challenges. Placing a family member in charge of the company’s succession plan rather than the full board, diminishes the board’s ability to select leaders who can successfully take the company into the future. It reinforces the idea that the company will remain under family control, which may not be best for all stakeholders. Tying voting power to charitable giving creates risk that money could be donated illegally or unethically to meet goals that would retain voting shares. And at a time when every Fortune 500 company has at least one women on its board, WeWork will start out with an all-male board, ignoring what many consider a new governance norm for boards.

WeWork’s brand guaranteed it positive attention from the capital markets, but these governance-related issues will likely bring higher scrutiny from investors and regulators. For governance advocates, that seems like taking risks that could be avoided. WeWork will likely have a solid IPO because many investors will choose the prospect of making money over any perceived lapses in corporate governance. However, it should be noted that many companies that start out with lax governance practices often run into problems that hurt their share price later.

If companies continue to use the dual-class share structure as a way to shift more decision making power from the board to the company founders, directors who sit on the boards of those companies will have a choice to make. Will it hurt their career to sit on a board where directors have less responsibility to carry out the traditional duties of the board? And is it worth the risk to sit on the board of a company that doesn’t seem to prioritize good governance and hope no scandal will erupts?

Directors might also want to remember that outside observers tend to believe many boards of companies with dual-class shares are controlled by the founders. While that label may not be deserved, at the very least, directors who serve on companies with dual-class share structures may want to consider that since the founders do have the ultimate decision making authority, the board’s input on many things may be muted. Casting a vote against the founder may be a very difficult position to take, even when good governance supports it. Such situations can affect a director’s experience on a board.

As more companies adopt the dual-class share structure, there will be more scrutiny on the actions of these company’s boards. The scrutiny is likely to be even more acute now that The Business Roundtable has issued a new statement on “the Purpose of a Corporation.” Directors who take positions on these boards should be aware that their tenure may be more difficult as a result.

Read more: Do Dual-Class Shares Improve Company Performance? That’s Hard To Say, ISS Study Finds

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