Imagine a world in itGoogle is a smaller, private company, not the global Alphabet company of today. Surprisingly enough, this almost happened. Google co-founders Sergey Brin and Larry Page have been reluctant to publicize their shares because they fear that sharing control of the company with shareholders will force them to do things they don’t want to do. A chance meeting with Warren Buffett changed their minds. Buffett explained the two-tiered stock structure he used to retain control of Berkshire Hathaway, even though he did not own most of its shares. Brin and Page realized they could use a similar approach to maintain control of Google, and when they launched their initial public offering, they modeled their stock structure on Berkshire.
This revelation comes from the book Super Pumping: Uber Battle by Mike Isaac, which was released in 2019, but is getting a lot of attention these days as the basis for the new Showtime series. Isaac, an old technical reporter for New York timesHe writes a lot about Silicon Valley in general in his book. In it, he recounts what an unnamed investor told him: that even as Google grew under her leadership, along with CEO Eric Schmidt, Brin and Page resisted the IPO because they feared the loss of control that could accompany it.
But when they met the Oracle of Omaha and talked about their reluctance, Buffett explained the Class A and Class B stock system he used at Berkshire Hathaway. Shares owned by Buffett and some others have one vote per share. B shares carry only 1/10,000 votes per share. This means the company can sell shares to investors but remain protected from active shareholders and hostile takeovers.
Although such classes of stock were unusual in the tech industry, Brin and Page decided to copy the structure. In the case of Google (now Alphabet), A shares carry one vote, and each B stock carries 10 votes. Brin and Page hold between themselves 51 percent of B’s shares, giving them joint control of the company, even though they own less than 12 percent of its total shares.
They also copied another Buffett’s tactic – prior to the 2004 initial public offering, they put their philosophy in a letter called an “Owner’s Guide to Google Shareholders” which they admitted was inspired largely by Buffett’s 1996 “Owner’s Manual” for Berkshire shareholders.
In their letter, Page and Brin talk about their leadership philosophy and their concerns about external influence for shareholders. They wrote:
“As a private company, we have focused on the long term, and that has served us well. As a public company, we will do the same. In our view, external pressures often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations. At times, this pressure has caused Companies manipulating financial results in order to “achieve a quarter”.
The co-founders went on to explain that they may take actions they believe are in the long-term interest of the company and its shareholders, even though such actions may cause profits and stock prices to fall in the short-term. “We ask our shareholders to take a long-term view,” they wrote.
You know the rest of the story. Google shares went public at $85 a share, and after splitting two for one in 2014, each of those original shares is worth more than $5,000 today. Brin and Page are still so serious about retaining control, that they split the shares by creating a new class of “C” stock that has absolutely no voting power. Persons who had A or B shares at the time of the split received one non-voting share for each voting share they held. Investors continue to buy Alphabet, and Berkshire Hathaway as well, even without significant voting power, because these companies are still very good investments.
The thing is, Brin, Page, and Buffett were also right to insist on retaining control. Activist shareholders and investors often argue that management’s most important role is to maximize shareholder value. Personally, I do not agree – I think that great managers serve the interests of investors, but also the interests of customers, employees and society as a whole. But even if you accept the idea that directors should only serve shareholders, who are the shareholders you mean? Who keeps the stock for a month or who holds it for a decade? Unfortunately, it is all too easy for short-term shareholders seeking quick profits to impose their will on the leaders of public companies. With multiple classes of stock, the founders of Alphabet and Berkshire Hathaway also made sure they could serve those they plan to be shareholders for years to come.