Robert Cyran / April 14, 2012, 0:18 IST
Google is no stranger to bad corporate governance. It set off the trend in Silicon Valley when it established super-voting shares in its 2004 market debut. Insiders Larry Page, Sergey Brin and Eric Schmidt now control 66 per cent of the votes with about a quarter of all shares. But the three have watched newcomers Zynga and Facebook surpass them in the governance race to the bottom. So, Google's founders are getting back in the race by adding a third class of non-voting shares. That'll do little more than entrench insiders and enable the future abuse of minority shareholders.
Under the proposal - which is sure to be passed due to insiders' support - all shareholders will receive a dividend of non-voting stock in what amounts to a stock split, while keeping voting proportions unchanged. All future equity grants to employees are expected to be in the form of non-voting shares. Page and Brin argue that separating voting control from economic interest has served the company well—allowing them the freedom to make long-term bets, such as its Android operating system for mobile phones and its Chrome internet browser, without having to keep a constant eye on quarterly results.
Yet, there's little reason to split a stock besides cosmetic appearance. Investors tend to award superb managers in any company lots of leeway. Steve Jobs, for example, could exercise dictatorial powers at Apple with only a small voting stake.
Moreover, Google's insiders already retain a complete chokehold on the company. The company would need to issue more than 300 million common shares or almost double what's currently outstanding—for Page, Brin and Schmidt's combined voting stake to slip below 50 per cent. Assuming Google didn't split its stock, that's enough for an all-paper acquisition of two Facebooks or decades' worth of stock grants to employees.
Yet, this change enables more pernicious effects. Non-voting stock will allow Google to purchase rivals or issue stock to employees without diluting insider control. True, the founders won't be able to sell their non-voting shares without seeing their voting stake go down due to a 'stapling' provision. But such clauses can be changed. The interests of insiders may eventually diverge from minority shareholders'—just look at how much grief Rupert Murdoch's control of News Corp has caused its investors. Google may not want to be evil, but this action certainly enables its insiders to be.
Weakness in numbers
John Foley / April 14, 2012, 0:17 IST
China's present condition can't be summed up in a few tenths of a percentage point. True, judged by the headlines, GDP growth of 8.1 per cent in the first quarter of 2012 was a miss. Economists polled by Reuters expected 8.3 per cent. Investors shouldn't overthink it: growth is the least of China's three big worries.
The slowdown is real, but well flagged. Premier Wen Jiabao set a target of 7.5 per cent GDP growth for 2012, compared with last year's realised 9.2 per cent. Against that, the current reading is hardly shabby, and may improve. Getting banks to lend more is one recourse that has already begun, with loans reaching one trillion yuan in March. There are signs things are already ticking up - such as the inching up of electrical production in March, often touted as a 'more reliable' measure of growth than GDP. If investors want to worry about something, they should start with politics. The mysterious ouster of high-profile Chongqing party chief Bo Xilai, and the arrest of his wife on murder charges, suggests a rising political risk premium as China nears next year's leadership change. There's no sign of a political breakdown, but increased anxiety at the top could slow big reforms on major issues, such as opening up restricted investment sectors or liberalising interest rates.
Fretters should also have an eye on the financial system. As with GDP, numbers mislead. China's banks reported non-performing loans of just over one per cent of their total books in 2011. But that's unsustainable, even if accurate. The banking system is built on distortions that promote misallocation of capital, with lending guided more by policy, collateral levels and implicit government guarantees than by considerations of risk and return.
Not that GDP growth won't present China with some thorny issues in 2012. Policymakers will soon have to decide, for example, whether they are happy to tolerate the inflationary pressures that come with using bank lending to stimulate the economy. And a political or financial shock would quickly make itself felt in the GDP figures. But the more complex China's situation gets, the less useful one big number becomes.
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