Silicon Valley’s culture of founder-dominated companies stands in direct conflict with the Wall Street tradition of activism by outside shareholders. As some of the most successful tech companies face sagging growth and slumping share prices, can the two sides find a way to get along?
That question is being put to the test most clearly at Meta and Alphabet, which have been on the receiving end of public letters from disgruntled shareholders in recent weeks. The insider control at both companies, enshrined in special classes of stock that give founders extra voting rights, means they can ignore unhappy investors with impunity. But the well-timed missives have hit a nerve at a time when Big Tech’s headlong growth has slowed.
The justification for supervoting shares was laid out most clearly by Google founders Sergey Brin and Larry Page at the time of their 2004 initial public offering. Their letter, which became a foundational text for the next generation of tech entrepreneurs, argued that founder control was needed to protect their company’s focus on the long term.
Less often noted, however, is that Google’s founders actually sought to define what they meant by the long term. Most projects, they said, should show “some realised benefit or progress” within two years, while their own decisions would be based on “three to five-year scenarios”.
Contrast that with the actual results of some of the most expensive bets from Alphabet, Google’s parent company. Its driverless car project is nearly 14 years old, with no sign of a market breakthrough in sight. In all, the company’s moonshot projects have racked up losses of $33bn since 2015.
Activist investor TCI, which holds a $6bn stake in Alphabet, is one those trying to force the kind of discipline that the founders themselves claimed to believe in. A similar concern motivated Altimeter Capital to call on Meta to slash its spending. The social media company is still relatively early in its long-term bet on the metaverse. But its open-ended bet on a giant project with no prospect of serious revenue in the near term triggered a collapse in its share price late last month.
Behind these shareholder entreaties is a fear that the riches amassed during the tech boom are being wasted and that the claims of long-term focus are an excuse for financial indiscipline. According to the critics, capital has been used inefficiently, while cash is piling up at companies that are spoilt for choices of what to invest in next.
Apple, whose management isn’t protected by supervoting shares, came under intense pressure around a decade ago to stop hoarding cash. The giant stock repurchases that followed turned out to be a boon for investors without weakening Apple’s ability to invest and the company’s shares went on to rise seven-fold.
The rapidity with which tech cycles often move has also given the lie to the long-termist argument. Some tech companies that went public with supervoting shares have had their strategic and management weaknesses exposed with startling speed.
Games company Zynga was sidelined by the boom in mobile gaming soon after its 2011 IPO and the founder eventually took the rare step of willingly giving up control. And Fitbit — whose supervoting shares were due to expire after 12 years — suffered a stock price collapse almost immediately after its IPO and sold itself to Google.
The best hope for reducing the tensions between Silicon Valley’s founders and the activists is a shared belief in the importance of reversing the decline in stock prices that has hit the sector over the past year. Much of the remuneration paid to workers at the biggest tech companies comes in the form of stock. Protecting their companies’ ability to compete for talent gives founders strong reasons to focus on the share price.
Mark Zuckerberg appeared to experience a change of heart after the rout in Meta’s shares last month, announcing plans to cut 13 per cent of his workforce. The shares have since rebounded about 25 per cent, though they are still 70 per cent below last year’s peak and many shareholders want more drastic action.
Chris Hohn, head of TCI, summed up the mood on Wall Street, declaring about Alphabet: “It’s in no one’s interest if the company becomes so fat and unhealthy. The argument is going to be true for all shareholders, all board members, all management.”
Perhaps, after all the divisive rhetoric that has coloured this debate from both sides, it’s time for a new meeting of minds.