Imagine a world where Google is a smaller private company rather than the huge alphabet of the world today. Surprisingly, it almost happened. Google co-founders Sergey Brin and Larry Page were hesitant to publish because they feared that sharing control of the company with shareholders would force them to do something they didn’t want to do. The chance encounter with Warren Buffett changed their mindset. Buffett described the two-tiered stake structure he used to maintain control of Berkshire Hathaway, even though he did not own most of Berkshire Hathaway’s stake. Brin and Page realized that they could use a similar approach to maintain control of Google and modeled Berkshire’s stock structure when they started the IPO.
The revelation comes from Mike Isaac’s book Super Pumped: The Battle for Uber, published in 2019, and has recently gained attention as the basis for the new Showtime series. Isaac, a longtime technical reporter for the New York Times, wrote a lot about Silicon Valley in general in his book. In it, he tells what an unnamed investor told him: Brin and Page went to the IPO, along with that of CEO Eric Schmidt, even if Google grew up under their leadership. I resisted the IPO because I was afraid of the accompanying loss of control.
But when they met Omaha’s Oracle and talked about their disgust, Buffett described the system of Class A and Class B stocks used at Berkshire Hathaway. Buffett and some other shares are cast one vote per share. Share B has only 1 / 10,000 votes per share. This means that the company can sell its shares to investors, but remains protected from activist shareholders and hostile takeovers.
Stocks of this class were rare in the tech industry, but Brin and Page decided to copy the structure. In the case of Google (currently the alphabet), A-shares have 1 vote and B-shares have 10 votes each. Brin and Page own 51% of their B shares and can jointly manage the company even if they own less than 12% of their total shares.
They also copied Buffett’s other tactics. Prior to the 2004 IPO, they presented their philosophy in a freely acknowledged letter entitled “Owner’s Manual for Google Shareholders.” ..
In their letter, Page and Brin talked about their leadership philosophy and their concerns about the external influence of shareholders. They wrote:
“As a private company, we have been focused for a long time. This has helped us. As a public company, we do the same. In our opinion, external pressure is on the company. Too often temptation to sacrifice long-term opportunities to meet quarterly. Market expectations. This pressure can cause companies to manipulate their accounts to “make a quarter.” “
The co-founder further explained that even if profits and stock prices could fall in the short term, they could take action that they believe would be in the long-term interests of the company and its shareholders. “I would like our shareholders to have a long-term perspective,” he said.
You know the rest of the story. Google’s shares went public for $ 85 per share, and after a two-to-one stock split in 2014, each of these original shares is today worth well over $ 5,000. Brin and Page are still serious about maintaining control, so they split the shares by creating a new class of C shares with no voting rights. The person who had A or B shares at the time of the split acquired one non-voting share for each voting share held. Investors continue to buy Alphabet and Berkshire Hathaway without much voting rights. These companies continue to be very good investments.
The problem is that Brin, Page, and Buffett were right to insist on maintaining control. Activist shareholders and investors have often argued that the most important role of management is to maximize shareholder value. I also disagree. I think good managers serve not only the interests of investors, but also the interests of customers, employees, and the community as a whole. But even if management accepts the idea that it should serve only shareholders, what shareholders do it mean? Do you hold the stock for a month or for 10 years? Unfortunately, it’s very easy for short-term shareholders seeking a quick win to impose a will on the leaders of listed companies. Alphabet’s founder, and Berkshire Hathaway, also hold multiple types of shares, helping to best serve those who plan to become shareholders over the years to come.
The opinions expressed by Inc.com columnists here are their own, not Inc.com’s.
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