The company couldn’t have held its IPO in the UK—but that’s not such a bad thingby Stephen Martin / March 13, 2017 / Leave a comment
Snap, the parent company of messaging app Snapchat, caused a stir when it listed on the New York Stock Exchange on 2nd March, with shares jumping 50 per cent in value in the first two days. But the founders of Snapchat, Evan Spiegel and Bobby Murphy, have kept a firm grip on decision-making by offering only non-voting shares to investors in their initial public offering (IPO). In the UK, this is considered to be contrary to good corporate governance, which is based on the principle that all shareholders have an equal say relative to the number of shares they own.
This principle has been questioned. Martin Sorrell, the CEO of WPP, the world’s biggest advertising firm, defended Snap’s policy, claiming that companies with dominant shareholders take more risks and tend to perform better. “Perhaps surprisingly, corporate structures that seem to offend customary good corporate governance may deliver better long-term results,” he said. In the short term, shares in Snap have tumbled since the first few days.
Investors could come to regret ignoring the governance issues, too. Murphy and Spiegel will dominate every facet of the organisation and investors will not be able to vote on key decisions that will define the company’s future, like board appointments and remuneration issues. It was one thing for the founders to act as omnipotent leaders when Snap was a privately owned company, but now they are spending other people’s cash.
Snap’s IPO was the biggest business story of 2017 to date. But we have been here before, not so long ago. In September 2014 the world held its breath as China’s largest e-commerce platform, Alibaba, listed on the NYSE. It drew frenzied interest from investors, with the company raising over $21bn to make it the world’s largest ever IPO. Similarly to Snap, Alibaba’s founder Jack Ma created a corporate structure that left himself and his partners in control, rather than shareholders.
Snap is following the lead of other tech companies such as Google and Facebook, which have issued multiple classes of shares. This happens for two reasons. First, the US Securities and Exchange Commission allows listed companies on the NYSE to issue, if they so choose, shares with no votes or diluted voting power. Second, investors are prepared to overlook this because they want a piece of the action even at the expense of shareholder power. When Alibaba floated it raised $21.8bn and sent stock surging 38 per cent.
As the world leader in corporate governance, the UK finds itself in a difficult position, trying to balance maintaining these standards versus attracting IPOs from tech giants. In the UK, shares deviating from the principle of one share one vote do not happen. This is not a result of formal rules, but rather a decision of UK institutional investors not to accept anything less than full voting rights. Purchasing non-voting shares leaves investors unable to influence the long-term strategy of the business, and so is spurned in this country.
Despite some analysts’ concerns about Snap’s revenue streams (the company hasn’t made a profit to date), it has captured a huge market of over 150m daily users. This should be a case of caveat emptor—nobody is obliged to buy shares, and if they don’t like the way the company is being run, they can always sell. However, Snap’s structure illustrates a trend in the United States of downgrading the role of shareholders in the governance of major companies that is not welcome here, and rightly so.
All companies with a premium listing in the UK must “comply or explain” with the provisions outlined in the UK Corporate Governance Code. These high standards may prevent tech giants like Snap or Alibaba from listing here, and indeed some will see this as unfortunate outcome. However, at a time when the eyes of regulators, investors and politicians are fixed on better corporate governance, we should not sacrifice the UK’s hard-won reputation on the altar of tech hype.