Executive Summary

At most U.S. firms, ownership is dispersedly-­held and voting power is proportionate to capital at risk. At a minority of firms, however, a significant amount of the vote is controlled by one party through a sizeable ownership stake or, alternately, through a multiclass capital structure created specifically to allow voting power to be disproportionate to capital commitment. These controlling parties often include company founders and/or insiders whose interests may or may not conflict with those of unaffiliated shareholders.

The issue of control has received much attention since the initial public offerings of LinkedIn Corp., Zynga Inc., Groupon Inc., and Facebook Inc. While these firms were taken public amid great fanfare and high expectations, the results have been mixed. As of Aug. 31, 2012, the market price of LinkedIn Corp. had risen over 138 percent from its Sept. 16, 2011, initial public offering but Zynga Inc., Groupon Inc., and Facebook Inc. had fallen 72.0 percent, 79.3 percent, and 52.5 percent, respectively, from their IPO prices. A common feature of these firms is a capital structure that allows founders to control a majority of the voting stock while holding a comparatively small portion of their firm’s economic value.

Supporters of these structures claim that control of a firm’s voting power enables management to govern with minimal outside interference and focus on long-term business growth, ultimately delivering shareholders higher returns in exchange for control rights. Detractors, however, claim that control mechanisms misalign interest between affiliated and external shareholders and allow insiders to operate without the normal accountability mechanisms. This study attempts to contribute to that debate by examining the prevalence, characteristics, and relative performance of controlled companies listed on exchanges in the United States.

Key findings of the study include:

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