I said yesterday that stock has value in part because the investor is owning something real, a tiny part of a larger company.  With that ownership usually comes the right to vote on the direction of the company, but not always.  Some companies like Google, New York Times, and WWE have a dual-share system whereby only certain shares are “voting” shares and all others have no right to vote on the direction of the company.  Or in Google’s case, many shares are voting shares but thanks to “super-voting” shares two people (Larry Page and Sergey Brin) hold 51% of voting rights and can never be outvoted by investors. Why would an investor buy shares knowing they don’t come with any rights?

Well first of all there is still some small amount of rights that come with a share, your ownership must be compensated if the company gets bought.  And of course the share may still come with a dividend or an expectation of a dividend.  But without the ability to change the company by voting, the shareholders have no input on the dividend or the direction of the company in general.  I think that for large shareholders, they still have an expectation that they can move the direction of the company even without voting rights.  BlackRock and Vanguard Group, for example, are some of the largest holders of Google stock, and if they were to exit the company in a hurry it could crash the price.  Now these companies don’t want their Google investment to fail, they want Google to succeed so they succeed with it, but if they believe that the company is hopeless they can always exit in a hurry.  And because they are major investors (and their exit would crash the stock price), they have the ability to talk with Google higher ups on the regular.  This gives them an interpersonal line of communication to voice their grievances and request changes, even if they have no legal recourse to change Google’s behavior.  Google in turn doesn’t want to upset major investors, and so may acquiesce to some things in exchange for investor assurances.

These sorts of interpersonal dynamics go on all the time in the world of finance behind closed doors.  We can read countless examples of them from the 20th century since people retired and wrote tell-all books, but I doubt we’ll get any about Google until those books are written in the future.  But interpersonal relationships between investors and management can be as or more important than the legal framework that regulates them.  Large investors have some amount of power and access with a company, even if using their power by selling the stock would hurt the investor as much as the company.  Meanwhile management wants as high a stock price as possible and so can make an effort to placate the investors.  In this way, at least some investors will still feel that they have input into the direction of the company, even if they can’t change its direction by voting.

Now, with this voting vs non-voting shares, I do think this is neo-feudalism and must be stopped.  The WWE shares, for instance, stipulate that only the descendants of Vince McMahon can ever hold the super-voting shares in the company, any shares sold by them get converted into lower-voting or non-shares.  This allows people to inherit what are basically titles of nobility that no one else could ever have.  Only the descendants of ennobled investors can ever steer the direction of the company, even if they own far fewer shares the the other investors.  Capitalism is supposed to be plutocratic and this sort of hereditary nobility will do more to harm competition than any possible good it could do.  It’s no accident that the poorest countries during the industrial revolution of the 19th century were those that held on tightest to nobility and titles, money can’t compete with inherited rights.

A free market absolutist might claim that you can just start your own business and replace Google or WWE but we all know that’s not how the world works.  Large companies can have an outsized influence to maintain their market share even if there is some modicum of competition so that they don’t count as “monopolies.”  In the end, ennobled families will hold unwarranted power over cornerstones of the world economy, and those cornerstones will be hard to replace due to their sheer size and ability to buy or outlast the competition.  In the end, we’re all worse off.