Powerful tech bosses losing their superpowers

By Simon Edelsten manages global equities at Artemis Investment Management.

From the ancient classics to modern cinema, superheroes come with flaws. Achilles had his heel. Ironman his heart. Today’s corporate crusaders are no different. Their most common flaw is hubris.

This year many people have paid the price for that hubris. Ask those who supported Sam Bankman-Fried’s cryptocurrency platform, FTX; or Twitter staff made redundant following Elon Musk’s takeover; or investors who bought shares in Mark Zuckerberg’s Facebook before it became Meta.

As shareholders we can assume there are controls to limit the powers of charismatic bosses when overarching self-belief becomes a problem. Boards are there to ensure probity and monitor the effectiveness of management. Shareholders have votes – we can limit remuneration for senior management and influence sustainability policies. But in some of the world’s largest technology businesses those controls are limited. 

In recent years many founders taking their company public have quietly awarded themselves a different class of shares enabling them to appear accountable but to retain much of their independence. Founder shares can often carry 20 times the voting power of the rest. This is particularly prevalent in the US. In 2020, roughly 60% by value of initial public offerings there came with dual voting class shares – three times as many as in 2018.

It is important to understand the risks if you own a stake in a company where dual share classes render your vote virtually meaningless.

In early 2019 we met the management of an interesting tech business that promised to make video conferencing easier. We liked the company’s founders, but the stock-based compensation model seemed skewed too far in their favour. We abstained. That business was Zoom. Shortly afterwards Covid hit. As pandemic gripped the world, Zoom’s shares zoomed! Had we made a mistake? We do not think so. Today, the share price is down 87% from its 2020 high.

Other companies floated on public markets the following year tell interesting stories. Two that gave their founders powerful “Class B” shares are homestay business Airbnb and US food delivery platform DoorDash. Airbnb shares are down 47% this year; DoorDash shares have fallen 63% By comparison, the US Index is down just 18%.

Many of the largest technology companies also have dual share classes. Meta and Alphabet’s founders have just over half the voting rights. Shares in Meta have fallen by 67% over the past year; Alphabet’s by 34%.

Amazon.com does not have dual voting rights, but founder Jeff Bezos still owns near 10%. Its shares have nearly halved this year. Microsoft, which has a “one share, one vote” principle, has seen its share fall just 27%.

Warning signs

Of course, there are many reasons for the decline in tech stock shares this year. But hubris has been a factor. Founders become distracted – so convinced in their powers that they want to play new games to show how clever they are. I am wary when profits start being diverted in vast amounts to projects that have little or nothing to do with the main business – to fire rockets into space, for example.

They lose their financial discipline. Amazon now has around 1.6mn employees, putting it almost up with the Chinese Red Army in complexity. Yet in the past five years dollar sales per employee have fallen by 8%.

Meanwhile, at Microsoft, the workforce has nearly doubled to 221,000, but at least dollar sales per employee are up 40%.

Latest financial statements show costs at many tech businesses have risen and sometimes by surprising amounts. Often this comes back to people — skilled professionals who had been paid in shares wanting cash instead. Paying in shares has become a common way for US companies to reward staff. It has been tax-efficient and can help mask true employee costs in financial reports.

But when share prices are weak staff need dollars to pay their electricity bills. In Alphabet’s last report costs and expenses (people) rose nearly 18%, while revenues rose 6%. This is why, if we are valuing a company, we factor in what costs might look like if senior staff were paid market rates through monthly salary rather than share options.

When the economy hits turbulence and problems mount, you want strong, accountable management with long-term vision. But it must also be focused on costs today and the interests of shareholders – fellow owners.

Over the past decade many of the tech superheroes have rewarded their shareholders fantastically. Investors have learned to put a lot of trust in these chief executives and their mythological powers. Is that trust still justified?