Companies such as Meta, Twitter, Amazon, and Google are currently experiencing important difficulties: high levels of debt, uncertainty among their investors, stock market devaluations, unstructured diversification, free-market abuses, and litigation concerning the treatment of their employees… Yet all these difficulties and challenges serve to reveal one major underlying obstacle: the governance of such companies.
This is the main argument of Professor Jordi Canals‘ latest article, published on November 18 in the Spanish economic newspaper Expansión. The opinion piece describes various problems that technology companies face today, and stresses that the fundamental problem shared by these companies is corporate governance: “A company, no matter how good its business model is, cannot last without adequate corporate governance,” he argues.
Canals points out that one of the factors that has pushed ‘Big Tech’ towards a sort of crisis is the dual-class shareholders model. This system, allowed in the United States, is designed to encourage founding entrepreneurs to grow their companies according to their own ideas, for which they are given greater control of the company for a specific period, whether or not they hold the majority of the company’s shares.
This model, based “on the hypothesis that founders have a special ability to guide the company and make the necessary strategic decisions at all times,” has various adverse effects, according to Canals. For example, that the founding shareholder ends up controlling a board of directors that will find it very difficult to take contrary positions. “This mechanism, which might be acceptable in a private family business, ceases to be acceptable in a listed company with numerous minority shareholders,” he adds.
Another problem with this model is that – with all investor confidence placed in the founders – the company enters “uncharted territory” when the business model stops working, leaving perplexed investors to merely watch events without knowing how to act. “The company goes into crisis because of the business model, but the situation worsens because its governance system is incapable of solving this type of problem,” he explains.
Furthermore, this whole model takes into account the founding shareholder more than its board of directors or its workers, so that “the team, strategy or business model is valued less, and the company’s governance system tends to be neglected.” Despite some concern for shareholders and value creation, he continues, “Most investors blindly trust the founder, until the business model is declared unviable.”
A more favorable option
Canals believes that designing good governance of firms requires thinking about a system that can balance the power of the three major decision-makers in any company: board of directors, shareholders, and the CEO supported by a management committee. “The balance between them is not static or universal. It must adapt according to the nature of the company, as well as its evolution and needs,” says Canals.
In this sense, corporate governance must ensure that the distribution of decision-making power in the company is adequately distributed “to protect investors, employees, and customers.” At the same time, he continues, it must “help to make better decisions, with a reasoned contrast of facts and arguments.” In the current Big Tech model, “it is difficult for the board to mitigate the influence of the founders, even if an activist shareholder enters,” asserts Canals.
“Good corporate governance should achieve not only a reasonable balance in the exercise of power in the company, but also an ability to raise deep debates about how the company should be in the future. The weight of arguments and professionalism should be the dominant values, above the status of founder or the control of shares with higher voting rights,” he concludes.
