00:00This is a story about fairness. When SpaceX went public last month, investors were invited to buy into one of
00:06the world's most valuable companies, but they weren't buying equal voting rights.
00:11Instead, the IPO cemented Elon Musk's extraordinary control over the company's future, giving him more voting power than all other
00:18shareholders combined, as well as locking him in as chairman and CEO.
00:24SpaceX, as a public company, is an investment in Elon Musk and the cult of Elon.
00:31Well, you know, I visited SpaceX. It's extraordinary. It's extraordinary what they've done.
00:39This has captured the imagination, not just of investors, but really everyone.
00:45The reality is it's going to be a watershed event in terms of the space actor from Musk.
00:50Our job as institutional investors is to take calculated risk, and in the case of SpaceX, we simply could not
00:56make the numbers add up.
00:58Historically, public companies were simple matters, where each share gave the holder one vote, something still true for companies like
01:06Apple.
01:06But some founders decided that they needed and deserved a more than equal say in the running of the company,
01:13giving rise to two classes of shares, with some shares attached to multiple votes.
01:17A dual-class share structure, which is the case for companies like Alphabet and Meta.
01:24Lise Beyer is an IPO advisor and the founder of Class 5 Group.
01:28She says one advantage of the dual-class structure is that it allows companies to get their sea legs as
01:34they adjust to being public.
01:36The biggest thing is actually keeping activists away when the stock falls.
01:40And so what that means is founders can make decisions that may actually have a negative impact on the near
01:45term,
01:46without fear that if the stock falls on that news, someone will swoop in and take it away.
01:51From an investor's perspective, it's a double-edged sword.
01:54Investors, on one hand, can rightly feel, you're taking my money, I want to vote.
01:58On the other hand, investors, no matter how savvy they are, don't actually know what's going on inside a company.
02:06The dual-class structure provides a safety net for those investors who want to let management make the decisions they
02:15deem will work out best in the long run,
02:17without fear of losing their jobs if, in fact, there's a short-term hiccup.
02:21The dual-class share structure gained prominence with Ford's landmark 1956 IPO,
02:27allowing the Ford family to retain control even as the number of public shareholders grew.
02:33A similar two-class model was adopted by some media companies, like The Washington Post, The New York Times, and
02:39Fox.
02:40But what was once the exception is rapidly becoming the rule today.
02:44In 1980, just over 1% of IPOs used dual-class structures.
02:50By last year, that figured had climbed to 47%.
02:54They were not coming in any other kind of public stock until Google came along in 2004,
03:00where the founders had some very specific ideas of how they wanted to run the company.
03:05This paved the way for SpaceX to file for an IPO under an unusually extreme dual-share structure.
03:11While Musk holds just over 40% of the company's equity, he controls over 80% of the total voting
03:18power.
03:19Lucien Bebchik is director of the Corporate Governance Program at Harvard Law School.
03:23What we have here goes much beyond just letting Musk determine the business strategy for some time.
03:33First of all, even if you believe that Musk is now by far the best to choose the business strategy
03:46of the company,
03:48this doesn't mean trusting how we will then allocate the pie that is generated by the company
03:56between public investors and himself.
04:01One key role of corporate governance arrangements is to constrain insiders from allocating to themselves
04:11an excessive slice of the pie at the expense of public investors.
04:17There's also the question, even if you believe wholeheartedly in Elon Musk today,
04:23Elon Musk may not be there or be the same Elon Musk 30, 40 years down the road.
04:28Yes, David, here you are completely correct.
04:32Furthermore, the governance structure that entrenches control in the hands of whoever has the B shares is indefinite,
04:43which means that if Elon Musk or when Elon Musk passes away, we are all mortal,
04:52then investors cannot rely on Musk's hairs or whoever manages the trust through which his high voting shares are held,
05:07that they would be the most fitting leaders.
05:11And then there's the question of how to ensure that a superstar CEO remains fully committed to the company
05:17over which he has nearly complete control, something that's been an issue before for Mr. Musk at his other venture,
05:24Tesla.
05:24A similar concern arises in connection with SpaceX, because even though in the governance structure of SpaceX,
05:36there is an ironclad commitment to have Musk in the CEO and chair positions,
05:43there are no constraints whatsoever on how much time and effort he will spend outside SpaceX.
05:52The world is well aware of the extraordinary SpaceX governance structure, and it gives some potential investors pause.
06:00Anders Schelde is the chief investment officer of Akademiker Pension,
06:04a Danish pension fund that manages more than $20 billion in assets, primarily on behalf of academics.
06:11It recently placed SpaceX on an exclusion list for investments, specifically citing the company's catastrophic governance.
06:18Maybe the Elon Musk brand is very strong in the US, but it's not so strong in Denmark, actually.
06:23I would rather say that, you know, many people driving a Tesla is maybe a little bit embarrassed about it.
06:28And certainly among our scheme members, there's a huge reputational risk in investing in an Elon Musk-led company.
06:34So I've been here for nine years now, and I never experienced in my nine years as CIO so many
06:41scheme members coming back to me
06:43with positive comments from a single investment decision as I experienced in the wake of the exclusion of SpaceX.
06:50What do you look for in governance, either to have or to avoid as you make investments?
06:56We hold good governance very, very highly.
06:59We think it's extremely important in order to assure accountability and transparency and sound decision-making.
07:06And I think, you know, good governance to us, to our mind, really lies at the core of the trust
07:12that we need in public markets.
07:15One share, one vote.
07:16The distribution of power should be proportional to the money invested.
07:20We have the separation of power between CEO and chairman of the board.
07:25We don't like that to be the same person.
07:28We think that creates a risk of poor decision-making and excessive risk-taking.
07:34And finally, the third principle is independence.
07:37We want an independent board.
07:39Do you see a trend, or are you concerned about a trend, with the success of SpaceX that other companies
07:44may follow suit with respect to corporate governance?
07:47Definitely the fear that, you know, this might inspire other to go in the same direction.
07:54We could be heading in that direction of even further concentration of power with a few founders in some very,
08:00very major companies.
08:02And I think that is, in that environment, it's important that we as institutional investors try and pull in the
08:09other direction to get the balance right.
08:11When the balance so unevenly favors one person's interests, what power do the rest of the shareholders have?
08:19After all, it is also their money that's on the line.
08:24Investors do have one really important tool at their disposal.
08:27They don't like what's going on.
08:29They can sell the stock.
08:31That's their point of leverage.
08:33Retail investors, to be quite honest, don't have much of a say anyway, because most of them don't have enough
08:38voting power to make a difference.
08:40So, should they care?
08:42Sure, because there should be some forcing functions on management teams to remember that they have sold stock to the
08:50public in return for committing to run the business like a public company.
08:57Ultimately, it will be for markets to decide whether that balance of power is fair for all shareholders or tilts
09:04too far toward the founders.
09:06As always, the markets speak most loudly through the value put on the stock.
09:10And at least at the beginning, Elon Musk is not facing too much pressure, given SpaceX's initial market cap of
09:18over $2 trillion.
09:19Whatever value you estimate and you attach to the business prospects of SpaceX, you need, as an investor, to discount
09:34it significantly because of the governance flows.
09:40Did the market provide, attach such an adequate discount?
09:46We cannot tell from what we see in the market, but I think it would be important for public investors
09:54to do so.
09:55And I hope, David, that this interview might help a little bit in informing public investors about this issue to
10:05which they should pay close attention.
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