The Social Benefits of Control

Multiclass share structures have exploded in popularity over the past twenty years since Google went public with one in 2004. This uptick has occurred despite profound concerns over the threats such structures can pose to good governance. Multiclass structures create uneven shareholder voting rights, granting insiders voting power that exceeds their economic stake in the firm. As a result, insiders generally maintain firm control while still getting to raise money on public markets.

Because multiclass structures insulate insiders from voting accountability, they increase the risk of self-dealing at the expense of outside shareholders. This self-dealing may be monetary—allowing insiders to amass personal fortunes—or it may be idiosyncratic—allowing them to gain power, control political agendas, or simply pursue pathways they personally value. For example, Mark Zuckerberg may keep his controlling stake in Meta not just to get rich, but also to pursue his personal vision for the company, gain power, shape political agendas on privacy and artificial intelligence, or any other number of personal reasons. The discourse around multiclass structures has focused largely on whether these arrangements, which allow insiders to extract private benefits of control, represent the value-enhancing products of private bargaining, or anti-democratic threats to shareholder value.

In a recent article, one of us argues that this discourse is overly narrow, overlooking how multiclass structures can generate not just problematic private benefits of control, but also valuable social benefits of control. Indeed, multiclass structures can help support a growing number of firms that seek to pursue social and environmental goals in addition to profit. Take, for example, a firm like Allbirds, which prioritizes environmental sustainability even if it may sometimes conflict with generating short-term profit, or Nike, which has displayed a commitment to improving racial equity even when it has sometimes cost the firm in the short run. Both firms rely on multiclass structures to help bolster their pro-social objectives. How do they do so?

The article argues that social benefits of control accrue in two main ways. First, multiclass structures help solve a thorny contracting problem between socially conscious firms and their bargaining partners. An increasing number of socially conscious parties—across the political and ideological spectrum—now seek to bargain for firm social performance, including impact investors, employees, suppliers, and more. When entering these contracts, socially committed parties rely on representations that they will receive social performance returns alongside financial returns. Yet for publicly traded firms, objectives beyond profit are especially susceptible to outside pressures that undermine pre-existing contracts for firm social performance. In particular, the threats of short-termism and activist investors (who target firms they perceive to be financially under-performing and then frequently jettison firm social goals) make it challenging for publicly traded firms to credibly commit to social performance in the long-term. Socially conscious firms thus become unreliable contracting partners. And because compensating non-breaching parties for the loss of social performance is particularly challenging, socially conscious firms and their contracting partners are left without viable ex ante or ex post options for protecting their agreements.

This is where multiclass structures can play a critical role converting socially conscious firms into more reliable contracting partners. By insulating firm social goals from short-termist pressures and activist investors, they enable prospective contracting partners to more confidently engage with socially oriented firms. More reliable contracting is especially important for employees, who may trade lower compensation in exchange for working for a socially conscious firm and who may have limited exit options should the firm abandon its social performance.

Second, multiclass structures can help promote declining public markets by providing a more attractive public option to firms with objectives beyond profit. A key reason these firms may stay private is to protect their social performance from the above-identified threats. Although individually rational, the decision to remain private has systemic consequences that risk destabilizing markets. By addressing a key reason why firms with objectives beyond profit may stay private, multiclass structures can help promote declining public markets to the broader benefit of society.

Though multiclass structures can provide important social benefits through firms with objectives beyond profit, they are also subject to valid criticisms that are imperative to address. While multiclass structures remove susceptibility to outside pressures, they also remove accountability to outside shareholders, increasing the risk of managerialism and insider self-dealing. Additionally, there is also an acute risk of deception if firm leaders overstate or even lie about their commitments to firm social goals and instead use multiclass structures to extract private benefits of control.

Luckily, we are not without recourse. To address these concerns, the article advocates event-based sunset provisions, improved disclosure mechanisms, enhanced metrics, and additional third-party oversight. Event-based sunsets convert a multiclass structure into a single-class structure on the occurrence of a certain event. They can be used to ensure accountability and to enact costly (and therefore more authentic) signals of firm social commitments. For example, firms can adopt event-based sunsets that trigger if the firm fails to meet a pre-determined metric, such as reducing greenhouse gas emissions by a certain amount or exceeding a given differential in pay equity between the C-Suite and lowest paid workers. Firms with objectives beyond profit can also improve their disclosures, develop enhanced metrics for tracking social outcomes, and adopt third-party oversight mechanisms, such as meaningfully empowering a social guardian on the board of directors or conducting independent audits of firm social performance. Doing so creates greater accountability for entrenched firm leaders and decreases deception concerns by allowing outsiders to more transparently assess firm social claims.

When implemented with such guardrails, multiclass structures can provide valuable and under-appreciated social benefits of control, enabling socially conscious contracting and promoting more robust public markets. These potential benefits are important to consider and add greater complexity and nuance to broader debates over the role of multiclass structures.