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Either way, their existence (beyond founders that simply own lots of shares) suggests that public shares create governance problems that aren't explainable via

by rsj_hn 8y ago

Either way, their existence (beyond founders that simply own lots of shares) suggests that public shares create governance problems that aren't explainable via principal-agent or some other traditional economic explanation. I'm not sure I'd phrase it this way. Suppose option A earns you 5% and option B earns you 6%. But you, as a founder, really prefer option A to option B. Then you better not take your company public, because your personal preference doesn't match the market preference. In your example, going to Mars earns less money than selling the satellites, and Musk really wants to go to Mars. I don't see this as a governance problem -- Musk's pleasure in going to Mars plus the returns from doing that exceed the public's pleasure from the returns only. So since this is a bit of a vanity project, it can't be publicly controlled and remain a Musk vanity project. That's not a governance problem, it's how governance is supposed to work. But then you say that investors are happily buying these shares? Well, it's an expected income stream, so the shares are being priced. Happiness has nothing to do with it. A 5% return is still worth something, even if the share price would go up should the strategy change. In no model would the price of the suboptimal income stream be zero. The real question here is what happens to the visionary iconoclast who knows that going to Mars will result in a higher return. For them, it's not a vanity project but some kind of private belief that is more accurate than the market belief. In that case, non-voting shares will outperform in the long run. We can say that Steve Jobs was such a visionary and maybe Musk is, too. But how much do you want to bet on that? And is that really an argument for one type of structure over another? That your average company is run by some visionary genius that is smarter than the market? Is that a governance problem? No, not at all.

netcan 8y ago
I'd say the tension between your first paragraph and your last gives us the grey area that I was talking about. Ultimately, the big difference between whiteboard and reality in the "A or B" scenarios is that the rates of return are not known. You can represent the scenario such that an investor has some working risk-weighted estimate but... Idk. I think a rocket company just doesn't lend to that type analysis, in practice. The long term comes down to belief in one way or another. Personally, I suspect that the reason for these arrangements in the face of traditional economic rationale is kinda meta. We already have a lot of large companies under traditional, often institutional shareholder control. This tends to yield a uniformity and leaves certain opportunities on the table, whichever strategies get reliably vetoed by a generic, institutional shareholder elected board.
- rsj_hn 8y ago
  But my point is that public ownership generally calls for public beliefs about returns to drive the show. The gap of the visionaries can usually be handled by private ownership. Let the visionary obtain funding elsewhere if they cannot convince the public their plans are better. I don't see this as a governance problem but as kinda the definition of public versus private ownership.
  - netcan 8y ago
    if they cannot convince the public their plans are better I don't think we're very far apart. I just think that statement leaves some room that is (possibly) being filled by these "founder controlled" agreements. For one thing, they can convince investors. They do. Elon et al are great at getting people to invest. There's just no "enterprise grade" way of actually making that deal with the public. In any case, why can you sell shares that don't vote but not shares where you still go to mars, never pay dividends or whatever. If investors buy them, who loses? I wonder what would happen to Google's share price if founder control was suddenly ceded. Theoretically, it should go up, no? But, I suspect it mightn't. Market rationality is a relative term.
    - rsj_hn 8y ago
      In theory, I don't see a problem with this type of share structure and don't believe an investor would lose anything by buying this stock at an appropriate price. Shares with fewer rights will sell at a discount to shares with more rights. In practice however, there are good reasons why the exchanges and others want to discourage these types of corporate structures. It is difficult to price the risk of a CEO going off the reservation, so to speak, and investors will be unable to pressure the CEO or replace the board in case the CEO ends up not being a good steward of investor funds. There are always principle agent problems, and having the CEO on a longer leash means that pricing the stock becomes a lot harder, and you will end up with a lot of mispriced assets, certainly ex-post and probably ex-ante. This is true even if the average of all such assets is properly priced. That is a welfare destroying thing. E.g if the universe contains two stocks that should each be priced at $1, and one is priced at $2 and the other at 50 cents, then this is welfare destroying. So anything that adds opacity to long run returns is bad for the market -- you can't just say that investors will properly discount the opacity. This is why we have disclosure regulations rather than letting firms not disclose financial information and letting the market price that. IMP it would be much better for Musk or someone else to create a charity with the goal of going to Mars and endow it with ownership of stock of for profit firms like SpaceX. This is cleaner than having a for profit firm adopt a pseudo charitable role. You also have to think of what will happen to these super voting shares after the CEO/founders are gone. Will their kids share the same vision and foresight? Having these types of structures creates a lot of practical problems even though in a simple theoretical model there is nothing wrong with doing it.

by rsj_hn 8y ago

netcan 8y ago

I'd say the tension between your first paragraph and your last gives us the grey area that I was talking about. Ultimately, the big difference between whiteboard and reality in the "A or B" scenarios is that the rates of return are not known. You can represent the scenario such that an investor has some working risk-weighted estimate but... Idk. I think a rocket company just doesn't lend to that type analysis, in practice. The long term comes down to belief in one way or another. Personally, I suspect that the reason for these arrangements in the face of traditional economic rationale is kinda meta. We already have a lot of large companies under traditional, often institutional shareholder control. This tends to yield a uniformity and leaves certain opportunities on the table, whichever strategies get reliably vetoed by a generic, institutional shareholder elected board.

rsj_hn 8y ago
But my point is that public ownership generally calls for public beliefs about returns to drive the show. The gap of the visionaries can usually be handled by private ownership. Let the visionary obtain funding elsewhere if they cannot convince the public their plans are better. I don't see this as a governance problem but as kinda the definition of public versus private ownership.
- netcan 8y ago
  if they cannot convince the public their plans are better I don't think we're very far apart. I just think that statement leaves some room that is (possibly) being filled by these "founder controlled" agreements. For one thing, they can convince investors. They do. Elon et al are great at getting people to invest. There's just no "enterprise grade" way of actually making that deal with the public. In any case, why can you sell shares that don't vote but not shares where you still go to mars, never pay dividends or whatever. If investors buy them, who loses? I wonder what would happen to Google's share price if founder control was suddenly ceded. Theoretically, it should go up, no? But, I suspect it mightn't. Market rationality is a relative term.
  - rsj_hn 8y ago
    In theory, I don't see a problem with this type of share structure and don't believe an investor would lose anything by buying this stock at an appropriate price. Shares with fewer rights will sell at a discount to shares with more rights. In practice however, there are good reasons why the exchanges and others want to discourage these types of corporate structures. It is difficult to price the risk of a CEO going off the reservation, so to speak, and investors will be unable to pressure the CEO or replace the board in case the CEO ends up not being a good steward of investor funds. There are always principle agent problems, and having the CEO on a longer leash means that pricing the stock becomes a lot harder, and you will end up with a lot of mispriced assets, certainly ex-post and probably ex-ante. This is true even if the average of all such assets is properly priced. That is a welfare destroying thing. E.g if the universe contains two stocks that should each be priced at $1, and one is priced at $2 and the other at 50 cents, then this is welfare destroying. So anything that adds opacity to long run returns is bad for the market -- you can't just say that investors will properly discount the opacity. This is why we have disclosure regulations rather than letting firms not disclose financial information and letting the market price that. IMP it would be much better for Musk or someone else to create a charity with the goal of going to Mars and endow it with ownership of stock of for profit firms like SpaceX. This is cleaner than having a for profit firm adopt a pseudo charitable role. You also have to think of what will happen to these super voting shares after the CEO/founders are gone. Will their kids share the same vision and foresight? Having these types of structures creates a lot of practical problems even though in a simple theoretical model there is nothing wrong with doing it.