In Defense Of Dual-Class Shares
The two-tiered structures, which offer more voting power to some shareholders, are frequently maligned. But Yale SOM leadership and corporate governance expert Jeffrey Sonnenfeld writes that they endow companies with a host of advantages, including a better return to investors.
This commentary originally appeared in Corporate Board Member.
As the 2025 proxy season launches, dual-class shares may once again become a common target of proxy ratings firms and activist investors. These reflexive critics miss the reality that dual-class shares can often be a vital protector of shareholder value and allow vital structural advantages such as:
- More efficient capital allocation: Unlike virtually every peer, Berkshire Hathaway under Warren Buffett has never paid a dividend, with Berkshire’s dual-class share structure enabling Buffett to substantively ignore occasional sniping from speculators. Over time, the reinvestment of retained earnings has proven to be 30 times more financially accretive for shareholders than if Berkshire had simply paid out regular dividends as its peers did.
- Insulation from short term opportunistic hostile takeovers: Hershey was nearly sold for a quarter of its current market value during a cyclical downturn, with the sale wisely stopped only because of its dual-class share structure.
- Facilitation of innovative risk-taking: Comcast CEO Brian Roberts was able to lure former JP Morgan superstar banker Mike Cavanagh as CFO and subsequently president, despite his nontraditional background—a move that worked out exceedingly well for all involved, but might not have been possible without dual-class share protection. Insulation from activist investor/ short-term profit pressure: Thanks to its dual-class shares, Dillard’s was able to resist activist calls to sell off its lucrative real estate, which would have destroyed the company but provided a one-time windfall
- Navigation of structural change: The New York Times navigated the print-to-digital transition far better than many peer newspapers, because it was able to invest heavily into its fledgling digital business in the early 2000s thanks to the Sulzberger family maintaining control through dual-class shares. Similarly, Ralph Lauren’s early investments in Gen Z and Millennial customers are paying off, adapting far better than luxury fashion peers to changing generational tastes.
Many consistent, historic outperformers within the Russell 3000 are dual- and multi-class stock companies, such as Berkshire Hathaway, Visa, Nike, Hyatt, Heico, Regeneron, McCormick & Co., and Blackstone, representing virtually every sector of the economy.
Of course, dual-class shares are not the right answer for all companies all the time. As critics are quick to note, there are even some situations where dual-class shares have turned downright ugly; for example, former CEO Conrad Black of Hollinger International was indicted for fraud after diverting company assets and resources into his own hands, abusing dual-class shares to facilitate self-enrichment.
But overall, there is strong evidence that companies with dual-class shares financially outperform peers. In fact, on average, the 244 companies in the Russell 3000 with dual-class or multi-class share structures handily outperformed the companies with single class shares across a 5- and 10-year span, according to a groundbreaking study published in the Harvard Law School Forum on Corporate Governance.
It’s not just long-term outperformance: We ran the numbers through November 15, 2024, and found that in 2024, companies with dual-class shares similarly strongly outperformed.
It is also reassuring that none of the most notorious corporate collapses and scandals took place at companies with dual-class shares. Enron, Worldcom, Tyco, Arthur Andersen, Bear Stearns, Lehman Brothers, Wirecard, Silicon Valley Bank, and First Republic Bank had single-class share structures, not dual-class shares, preceding their collapse from governance failures.
Clearly, universal activist investor critiques each proxy season regarding dual-class share ownership are often in error, missing the actual shareholder value these two-tiered structures create.