Google Stock Plan Irks Governance Watchdogs

Google Inc. (GOOG) (GOOG)’s shares fell the most
in almost three months after its latest bid to preserve control
for founders Larry Page and Sergey Brin raised concern among
corporate-governance watchdogs.

The stock (GOOG) declined 4.1 percent to $624.60, the biggest
decrease since Jan. 20, weighed down in part by results showing
slower sales growth and a decline in the amount Google charges
for advertising, on a per-click basis. The shares have fallen
3.3 percent this year.

Google unveiled a plan yesterday that lets the company
issue new shares without diluting the founders’ voting power.
The stock change would create a new class of nonvoting shares
that will be distributed to existing shareholders in what is
effectively a 2-for-1 stock split.

Page and Brin, who made no secret of their intention to
hold sway over the company when it went public in 2004, aim to
keep that control as Google grows larger. The latest move lets
the founders issue stock to compensate workers or make
acquisitions without loosening their grip. For investors, the
result is a lack of input on decision making, said Charles Elson, director of the University of Delaware’s John L. Weinberg
Center for Corporate Governance.

“Shareholder voting rights are pretty limited in Google,”
he said. “And this basically perpetuates that reality.”

Together with Chairman Eric Schmidt, Google’s co-founders
have about two-thirds of the company’s voting power, thanks to a
dual-class stock structure that was created before its initial
public offering eight years ago.

Opposition to Structure

The company already had one class of stock with less voting
power, Class A. The new type, Class C, will have none at all.

Egan-Jones Ratings Co., a shareholder-advisory firm, said
it opposes Google’s plan. Institutional Shareholder Services
Inc. and Glass Lewis Co., other advisory firms, are reviewing
the proposal and plan to issue reports on it before Google’s
shareholder meeting, scheduled for June 21.

“As a trusted adviser to institutional investors, we
strongly oppose governance structures, such as currently exists
at Google and as proposed, in which the holders of one class of
common stock have voting rights with fewer votes per share,”
Egan-Jones said today in a statement.

It’s hard to tell why the additional step was necessary,
said Tim Ghriskey, a co-founder of the Solaris Group, who helps
oversee about $2 billion in assets, including Google shares.

Dividend Desired

He would rather see Google pay a cash dividend, Ghriskey
said. Still, if investors aren’t happy, they can always sell
their shares, he said.

“We live with it,” Ghriskey said. “It wouldn’t be our
first choice. Our first choice would be split the stock and
don’t create two classes, and start paying a dividend.”

Google put in the original dual-class structure to insulate
the company from outside pressures while it made potentially
risky investments, such as the video-sharing site YouTube or the
Android mobile operating system, Page and Brin said yesterday in
a statement. The latest change solidifies those protections.

“We recognize that some people, particularly those who
opposed this structure at the start, won’t support this change –
– and we understand that other companies have been very
successful with more traditional governance models,” the
founders said. “But after careful consideration with our board
of directors, we have decided that maintaining this founder-led
approach is in the best interests of Google, our shareholders
and our users.”

‘Startling’ Decline

The announcement was made as part of the company’s first-
quarter earnings report. Profit, excluding certain costs,
climbed to $10.08 a share in the period, the company said on its
website. Analysts had projected (GOOG) $9.64 on average, according to
data compiled by Bloomberg. Excluding revenue passed on to
partner sites, sales rose to $8.14 billion, matching estimates.

That was the slowest increase in net sales in eight
quarters, Colin Gillis, an analyst at BGC Partners LP in New
York, wrote in a research report.

Google gets most of its revenue from Internet-search ads —
the text links that appear in query results. The average cost
per click, a measure of what Google can charge advertisers,
declined 12 percent in the first quarter, an acceleration from 8
percent in the fourth quarter.

Gillis called the decline “startling” and wrote that it
suggests “incremental search volume that is being created is
lower priced inventory.”

Founders in Control

The desire to hold on to control has always been a driving
force at Google, Gillis said in an interview.

“That’s been Google’s story,” he said.

While the new proposal will be subject to a vote at
Google’s annual meeting, the fact that Page, Brin and Schmidt
control the majority of voting power makes it likely to succeed.
“We expect it to pass,” David Drummond, Google’s chief legal
officer, said in yesterday’s statement.

Under the plan, investors will receive one share of the new
stock for each one they hold. So a share valued at $600 when the
split takes effect would become two shares, each valued at $300.

Paul Hodgson, a researcher at GovernanceMetrics
International Inc., a corporate-governance consulting firm in
New York, said the approach isn’t ideal because it puts
unnecessary limits on shareholders.

“That is anti-best practice as far as best governance, but
so was the dual-class structure in the first IPO,” Hodgson
said. “There are plenty of companies that have a single class
of shares, one vote per share, and they aren’t paranoid that
shareholders are going to somehow influence the future strategy
of the company.”

‘Unnecessarily Complex’

Google’s founders have lost voting power by selling stock
in recent years, and the new structure would help prevent them
from losing more, said Lise Buyer, principal at Class V Group in
Portola Valley, California.

“As the founders sell a little bit, as they have been
doing every quarter, their voting power relative to the
shareholder base is going down,” said Buyer, who helped advise
Google on its IPO.

The stock split won’t reduce investors’ power in the
immediate term, since they’ll still have as many votes as
before, said Clay Moran, an analyst at Benchmark Co. in Delray
Beach, Florida. Still, it adds one more layer of structure.

“It’s unnecessarily complex,” he said.

To contact the reporter on this story:
Brian Womack in San Francisco at

To contact the editor responsible for this story:
Tom Giles at

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