Share Classes Explained: Class A vs. Class B & Voting Rights

22:30Dave:So let's talk about some of the voting then. When we're talking about voting power, we're talking about control of a company. What does that exactly mean and how does it practically play out in most corporate situations?

22:43Andrew:Well, it can play out in a lot of different ways, but I think probably the things that most come to mind would be the direction of a business, whether the company is going to maybe change its business structure, or if it's going to change what it is that they offer or sell. That could certainly be up for discussion and voting. Anything like share buybacks, authorization to acquire companies' public shares on the public market has to be voted on. Things like pay for managers has to be voted on as well as pay for the board members. All of those things have to be voted on. And they have different committees that they set up as part of the board breakup or breakdown.

23:33Andrew:And they have different people, different CEOs or different C-suite managers may have different levels of committee responsibilities. and one thing to always keep in mind when you're looking at the proxy and kind of determining some of those things a big big big big big no-no or red flag is if the uh if the ceo and the chairman of the board is also on the compensation committee that is not a place you want to see because you do not want the person in charge of running the business and control the board also deciding how much he gets paid or she gets paid. That you do not want. I came across one company I always remember.

24:17I always forget if it's Blackstone or BlackRock.

24:21Andrew:But that CEO is also the chairman of the board is also the only committee member on the compensation board. So he runs the business. He also decides how much he gets paid and nobody can dispute that. So that's not great. Um, so if you see that kind of thing, yeah, just be aware. It's not a great place to be. Did I, are there any other things that I maybe missed or that you think would be good for people to know? Yeah.

24:53Dave:All of those things that you covered basically the biggest ones. Um, another one is just electing directors. So the, the directors and the board of directors, they have to stand for reelection or they will nominate a new board of director. Something that shocked me when I first learned about it because I didn't grow up in a boardroom. I know that might be hard for you all to believe.

25:23A lot of the board of directors

25:25Dave:are from other companies. They call them independent directors. Tim Cook was on Nike's board of directors. So you'll get this cross-pollination. And sometimes they'll pick some people that are in the industry. Sometimes they'll pick people that are outside the industry. You get good ideas, discussions, conversations when you have that diversity of experiences and all being brought to the table. And so, yeah, the director, who goes on the board of directors is voted on by the shareholders. And then those board of directors, like you were saying with compensation, they will keep the CEO in check.

26:13Dave:They will make sure he's being paid fairly, all of those things. And when that's all the same person, CEO, compensation, chairman, majority shareholder, there's not a lot of wiggle room to enact change if you're not happy in that situation. No, not at all.

26:32Andrew:Not at all. Are you familiar with the structure of a company like Google? I'm not. Okay. I can share a little bit. I'm not 100 % on this. So Google has three classes of shares. They have the Google A, the class A shares. These are the G-O-O-G-L. And this is what most of us buy. So this is one vote per share and it's publicly traded. So this is what we all see. If you go to your brokerage and want to buy Google, that's the share you're buying. There's a class B shares, and this is 10 votes per share. And this is held by the founders. So this is not publicly traded. This is what Larry Page and Sergey Brin own.

27:18Andrew:And this is what gives them control still of Google. And then there's a class C shares, which has zero votes and it's publicly traded. I'm not entirely sure why it would buy zero votes, but okay. But that's how Google has set up their class structure. And so the Class B shares still allows them to retain majority ownership of the business and allows Wary and Sergey to still control the puppet strings of what happens with Google, even though they're not, well, let me rephrase that, hadn't been actively involved in the business for a while. Yes. Yep, exactly. Yeah. And then I guess the last one we could throw out there would be Meta.

28:08Andrew:So Zuckerberg, as we've mentioned before, is the major shareholder of the, he's the major owner of the business. He owns approximately 60 % of the business and 60 % of the voting power of the business, I should say. And so that gives him very dominant control. So there's two classes of shares. There's the class A, which is one vote per share public. That's what we buy. And then there's the class B shares, which he owns the vast majority of. And so that's what gives him the power.

28:39Dave:Do we talk about Elon?

28:42Andrew:I think we should. I don't frankly know what the share structure is for Tesla. I'm guessing you do.

28:50Dave:No, I do not. but we can look at it and I think it would be interesting because I know there was a lot of talk maybe you can fill us in on what the general narrative was around Elon and compensation and things like that

29:04Andrew:so recently he was voted a shall we say generous compensation package by the board of directors and I want to say don't hold my feet to the fire but a trillion dollars,$1.5 trillion, somewhere in that range of money he was supposed to earn. Of course, the initial hullabaloo was people weren't reading any further than he was going to make a whole lot of money. What really needed to be kind of dug into was there was some pretty steep standards or incentives that he had to meet before he could achieve those kinds of numbers. And that I don't remember the specifics of, but it was outrageous revenue growth, outrageous market cap numbers compared to where the company is today.

30:02Andrew:I want to say five or six times, if not more, maybe 10 times the level that needed to be achieved for him to achieve that kind of payout. So from a bird's eye view, it looked super extreme. But then when you dug in a little bit further, it looks even more ridiculous because how could the company even achieve those kinds of numbers?

30:30Dave:So I had trouble finding the proxy statement, but I was looking at the DevA14A, which is not quite the proxy statement. but it's just a bunch of screenshots from Twitter, which I thought was funny. I've never seen that on BAMSEC or a financial document that has a bunch of screenshots from Twitter. Elon's retweets on here. There's a tweet from Tesla. It's literally right here in the dev.

30:58Andrew:The schedule 14A.

31:00Dave:That is so funny. Okay, so I did find the proxy statement. So Elon owns 19.8 % of Tesla, and then it's Vanguard and BlackRock. And I don't see anything about multiple share classes. So let me search. So if you're doing this homework at home and you're looking like a crazy person at all this different compensation, you can do Control-F to search for voting power. because like Dave was saying with Google, for example, they might not necessarily own 51 % of the company, but if they have voting power for 51 % because of their B class shares, give them the voting power, then that's what you really want to know because a proxy statement will tell you voting power and how much percent of shares you own as well as the different classes.

31:56Dave:So based on what I can see, and I didn't read it, I was just skimming, so take that for what it's worth. It doesn't look like there's any changes between voting power and how many shares you own. So it seems like it's just a one-to-one, just your standard kind of share structure for Tesla. So interesting story. Get the popcorn out for sure. Right. Yes, for sure.

32:17Andrew:Yes, for sure.

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33:54Andrew:I think that's really interesting. To me, it shows that he has full confidence that he can run the company and he doesn't need to worry about control. And although I'm sure he's quite the control freak, and that certainly seems to be true, he has enough confidence in his ability to do good things with a business that he didn't feel like he needed to have the same. And so maybe you could argue that maybe Zuckerberg didn't feel the same confidence level and felt like he needed to protect himself by having the dual share class. It's, you know, I don't think we'll ever really know unless we specifically ask him.

34:38Andrew:And I don't think Mark's taken my call. So I just have to, you know, speculate on that.

34:44Dave:Not at the moment. So I am curious then, as an investor, somebody who's researching lots of different businesses, maybe you can kind of talk about Watsco versus some other business in your portfolio. We've talked a lot about things that we don't like to see, like the compensation conversation. How are you approaching all of this information with share classes, ownership, voting power? Or how does that factor into your decision-making process, your research process? And then maybe at the end, you can talk a couple examples of how that's affected one company versus another.

35:27Andrew:Well, it certainly adds. I think when you're trying to research the business, it certainly adds a level of a layer of complexity. Because not only do you need to know who the people are that are running the business, You also need to know who has economic stakes and who has voting stakes and how do those two commingle. And it all goes back to one simple question. Do you trust the person running the business to do the right thing? Are they going to do what's in the best interest of me as a shareholder? and I'm not saying that necessarily selfishly but I'm saying that like are they going to behave in a manner that is going to benefit shareholders so if I put my money with Watsko is you know the owner and his son are they going to do the right thing you know when the owner passes away and the son takes over do I trust that he's going to continue being beneficial to me as a shareholder And if I don't, if I can't come to that conclusion, it makes it really, really hard to want to invest in the business.

36:41Andrew:When you're investing in companies that are a little more open about the voting power slash compensation equity or economic benefit, like a MasterCard or a Visa or a Microsoft or others like that, it's a lot easier because that layer of complexity is removed. and so it just makes it easier to assess okay do i think that a the company is a good business and b the people running it are going to do what's best for shareholders going forward and if that's happened in the past it's likely to continue happening in the future whereas if it's more founder-led then you're really betting on the founder because you're really betting on whether So that person, A, will continue to do what they've been doing.

37:31And because they probably likely have a higher percentage of voting power, they are also going to have a bigger share of economic benefit, which I'm okay with.

37:42Andrew:But if I don't trust that they're going to do the right thing, then it's going to make it a lot harder for me to invest in the business. And I think, you know, not to put the spotlight on Elon, but because he's erratic, to be kind, that can be one of the challenges with investing in a company that he's running. There's no question he's a brilliant guy. There's no question he's talented and he knows what he's doing, but he's erratic. And so if the ownership structure was situated such that he really went off the rails and there was no way to remove him, it'd be really hard to invest in that business based on that one factor.

38:31Andrew:Whereas if he goes off the rails the way it is now, there's a very high likelihood that an activist investor would come in and force that person to be removed. and that can help alleviate some of the erraticness or the worry about whether this person is going to continue to do a good job or not.

38:58Dave:Yeah, maybe from a high level, like activist situation, what does that mean? What does it kind of look like practically in the stock market?

39:10Andrew:I think the easiest way to think about it is there's a board of directors that are in charge of all these various parts of the business. And they have a certain ownership of the business. And they get nominated to be on the board by board members or the CEO or shareholders. And what will happen is that an activist investor, so Bill Ackman is a good example of this. he became an activist investor in Darden many years ago. And what he did was he bought a, he and his Pershing Square, his fund, bought a ton of shares. And so they became a larger percent ownership of the business. And that allowed them to be basically voted in by other shareholders because of his share of ownership, he was able to be voted onto the board and then he was able to start enacting changes that he thought needed to be happening at the company level to extract more value for shareholders.

40:21Andrew:Of course, for him, yes, there's certainly a selfish element to this, but he was also doing it for other shareholders because he felt like that this was a very profitable business and it was being mismanaged. and he wasn't able to, if Bill Ackman calls, I'm guessing most CEOs are probably going to take his call because he's a well-known investor with a lot of money at stake. So if he's talking to the management and they're not listening to him, that's really his only recourse. If he wants to stay in the business, then he could become an activist investor. And there are certain funds out there now that this is part of what they do is they become activist investors in different companies and they search out businesses to try to find companies they think they can take an active participation in and become board members and affect change at the company level.

41:18Andrew:Chipotle went through this. I believe, I know Darden did. There's been a bunch of companies. Browncastle heard it. There's been companies like that that have gone through big, big changes. I remember Herbalife back in the day was another one that Bill Ackman got involved in. So yeah, that is one way that larger shareholders can try to enact change at the corporate level. It's by buying shares, getting voted onto the board of directors, controlling more than one or two seats on the board of directors. and then they have voting power and then they can start to force the CEO either to go away or to make changes that they think will be beneficial for the business.

42:06Dave:And that can do some great things for a company stock too. It really depends on the situation. Obviously, everybody's different. Every situation is different. But if you can eradicate some of the causes of the failures and then kind of start with a cleanish slate, you will see some stocks that will go higher as soon as an activist has made their presence known. And they do that in various ways. And so if you're a struggling shareholder and you're sick of seeing your stock down for three years in a row while the rest of the market's screaming higher, sometimes any change is just a welcome change and you can see that play out quite not i don't want to say like quite often but it happens enough where um it does play a role and chances are if you if you buy enough stocks one day you will have one that goes through a situation like that

43:05Andrew:yeah yes for sure and this is why part of why also reading are we looking through the proxy or the um the, I guess, corporate ownership of the business can be helpful. It doesn't mean you have to read it every day or every time it comes out, but just please familiarize yourself with what's going on with the business so that you can kind of stay up on who is on the board of directors when there is any activist play going on with the business and whatnot because it will affect your business for sure.

43:38Dave:That was one of the key parts of my checklist I always used was, okay, what's the ownership? Are we talking majority or are we talking minority? Yeah.

43:49Andrew:Yeah, it's very, very important because, again, when you're investing in a company, you're investing in the people running it. It's not just the assets or the business itself. It's also the people that are running it. And you're putting your trust that they're going to continue to do the things that make that a successful investment. and if their track record is poor or if they have a history of doing poorly, then you got to ask yourself, why would I give these people my money?

44:18Dave:Yeah, the tough decisions. So if you are a investor, stock picker, you want to buy and hold stocks for the long term and this entire conversation has just freaked you out. Like if it sounds confusing or just like way too in the weeds? What kind of advice do you have for thinking about all these share classes and everything?

44:46Andrew:Yeah, that's a great question. I think probably the way that I try to think about it and the way that I've tried to approach it is try to, I guess the first level is try to understand, educate yourself on what the structure is of the companies. So in other words, learn what a proxy is, learn what information is in the proxy that's important for you. And we have written about that at einvestingforbeginners.com. You can search for the proxy statements and we've written about what you should search for and those kinds of things. And learn about how the companies are structured because that is, as we've talked about today, is very important.

45:33Andrew:I write about that a lot in the write-ups that I do for Value Spotlight. It's something that I think is important. I discovered this, I guess, importance two or three years ago. And so it's something I try to incorporate when I'm looking at every company is just try to give people an overview of what's going on with a company like Taiwan Semiconductor or MasterCard. And while these aren't ground-shaking, earth-shattering revelations, sometimes you can learn something that could be really interesting to know about that business and could be a bit of a KPI that you can kind of track as you're following the companies along to make sure that the things that you thought at the beginning are things that you will see as it continues to go on.

46:18Andrew:I guess those are some of the things I think about. What about, do you have any tidbits you would recommend? If it stresses you out, just stay away.

46:27Dave:Yeah. There's that too. Yeah. Just don't buy into stocks with majority ownership and be done with it. Yeah. That's true.

46:36Andrew:You don't have to swing at every pitch, right? Yeah. Yeah. Yeah. You don't have to swing at every pitch.

46:43Dave:Now give us a baseball player who did that. A swing at every pitch? Did not swing at every pitch.

46:51Andrew:Oh, did not swing at every pitch? Well, that would be easy. That would be Barry Bonds. He did not swing at every pitch. That's true.

46:57Dave:I thought you were going to say Ted Williams.

46:59Andrew:No, no. I think I would have to verify the numbers, but I think Barry had a higher walk percentage than Ted B. Yeah, I think so. I would bet my life on that, but I would not be surprised if it was.

47:13Dave:No, I wouldn't be surprised either. There's not very many players who get walked with the bases loaded to tie a game.

47:20Andrew:No, no, no. You know, I think one year he had over 100 intentional walks and he had over 220 walks for the season. So, yeah, like the closest person to him was like, you know, half of that. So, right.

47:39Dave:Well, hey, there is a little correlation there, right? Barry Bonds, massive power. Aaron Judge, massive power. They take a lot of pitches. They don't swing at a lot of pitches. And then who was the GOAT investor who did all that? Warren Buffett swing at nothing and had one of the greatest track records of all time. So I think there's something there. Food for thought. Yep, I agree. Coffee mug proved me wrong.

48:06Andrew:All right, folks. Well, with that, we will go ahead and wrap up our discussion on share classes and their importance. And with that, we'll go ahead and sign us off. You guys go out there and invest with a margin of safety, emphasis on the safety. And we'll check you out next time.

48:22Dave:We hope you enjoyed this content. Seven Steps to Understanding the Stock Market shows you precisely how to break down the numbers in an engaging and readable way with real-life examples. Get access today at stockmarketpdf.com. Until next time, have a prosperous day. The information contained is for general information and educational purposes only. It is not intended for a substitute for legal, commercial, and or financial advice from a licensed professional. Review our full disclaimer at einvestingforbeginners.com. Close your eyes, exhale, feel your body relax, and let go of whatever you're carrying today.

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