Thorny Side Effects in Silicon Valley Tactic to Keep Control

The gods of Silicon Valley have repeatedly sought to take the companies they founded public while retaining control as if they were still private.

Recent events at Google and other technology companies show that perhaps this control may be bad not only for the companies but also for the founders, who are increasingly living in a world bereft of checks and balances.

Silicon Valley has for the most part held public shareholders in mixed regard. Preferring to keep them on the sidelines is not a new development.

Google was a leader in this movement. When it went public in 2004, it did so using a dual-class structure. Its co-founders, Sergey Brin and Larry Page, were issued shares with 10 votes apiece, while public shareholders received shares with only one vote. The idea was to ensure that the co-founders kept control of Google even if they sold some of their shares.

But boundaries get pushed, as does everything in the tech world. Facebook went further in restricting shareholder control when it went public by adopting a dual-class structure that allowed its co-founder Mark Zuckerberg to keep control even if he owned less than 10 percent of the company. In fact, if Mr. Zuckerberg dies, his heirs still have the potential to control the company.

Putting this in perspective, had Apple gone public with Facebook’s structure, Steven P. Jobs’s widow, Laurene Powell Jobs, and Apple’s co-founder Steve Wozniak (most recently a “Dancing With the Stars” contestant) would possibly still be in control.

Not to be outdone, Google proposed last year that the company issue a new class of shares with no voting rights. According to public documents filed by Google, this share class was put into place at the behest of the founders, being justified by Mr. Brin and Mr. Page as allowing them to “concentrate on the long term.”

The idea is that absent the pressures of the public market, executives can look after the long-term best interests of the company. This will allow Google to experiment with things like Google Glass, which may not be immediately profitable.

It’s an alluring argument. On the plus side, this allows for the company to look out for a wide array of interests beyond shareholders’ that focus solely on stock price. In the media, this structure has worked with some success (The New York Times Company, for example, has a dual-class structure).

But the problem with this structure is that the shareholders’ voice of dissent is locked out. And studies have shown that in general, this type of dual-class structure does not perform as well as traditional arrangements.

Recent events raise another issue: technology companies have not done well in sustaining themselves when their founders leave.

Microsoft has struggled to find a path without Bill Gates at the helm. It recently cut deals with an activist shareholder, ValueAct Capital, to put a director from that fund on its board. And although Microsoft just announced a major strategic acquisition to buy Nokia’s handset and services business, a big question remains over who will lead Microsoft after Steve Ballmer steps down.

Apple is still a juggernaut, but it appears to be having its own sustainability issues without Mr. Jobs. Older stalwarts like Hewlett-Packard have also struggled to adjust their business model years after their founders’ departure.

Even when the founders stay, it hasn’t always been a happy outcome. One of Yahoo’s founders, Jerry Yang, led the company when it rejected a buyout offer from Microsoft at $31 a share in 2008 (the company’s shares subsequently fell to below $10 a share amid the financial crisis, recovering only last year after Yahoo brought on Marissa Mayer as chief).

Mr. Yang was subsequently replaced as chief executive. Two recent initial public offerings, those for Groupon and Zynga, proceeded with dual-class share structures, and both trade below their offering prices.

In Silicon Valley, founders’ control has not always translated into the long-term success. In fact, control may have nothing to do with it. One of Silicon Valley’s most successful companies these days is Amazon, based in Seattle. Jeffrey P. Bezos, chief of Amazon, owns only 19.1 percent of the company, according to its most recent proxy statement. He has seen no need to create a special share class to lock in his control.

There is perhaps another bigger problem with the dual-class structure in tech companies. This grab for control may exacerbate the bad effects from the culture of worship that surrounds these founders, leaving no one with the capacity to take over when they leave.

The concept is ubiquitous in psychology. People surrounded by no boundaries tend to overestimate their limits. Studies of chief executive behavior have found that the bosses tend to overestimate their confidence and take more risks, and they are more narcissistic.

In plain English, the great tech minds of Silicon Valley are told so often how great they are that they sometimes lose perspective.

This is not to say that these executives are not doing great things. Let’s acknowledge that they are brilliant at creating new technology and changing our lives.

But over the last few months, it feels as if Silicon Valley were taking on the hubris and attention-grabbing acts more commonly associated with Wall Street.

For instance, Sean Parker, the first president of Facebook, threw a wedding with a “Lord of the Rings” theme that was featured in Vanity Fair and widely criticized as being lavishly over the top. Elon Musk created media hype after he revealed the plans for a high-speed transit device between San Francisco and Los Angeles that looked more like a sci-fi gun that shoots out people. Ms. Mayer of Yahoo posed for a fashion shoot in Vogue, accompanied by a sidebar discussing high-end fashion options titled “What Would Marissa Wear?”

You can’t help wondering whether Silicon Valley lacks any balance.

As recent salacious developments at Google show, it can sometimes also lead to foolhardy decisions. Last week, AllThingsD reported that Mr. Brin had split with his wife and was dating a Google employee. Dating employees is always dicey, and although Google’s handbook does not forbid these things, it is clear that many a chief executive would be felled by similar behavior (like Brian Dunn, Best Buy’s ex-chief executive, who resigned amid questions about his “personal conduct”).

Google got the green light to issue nonvoting shares after the settlement of a lawsuit challenging the maneuver, a settlement that is awaiting final judicial approval. The issuance of the Series C shares with no vote will cement the founders’ control. But does Google really need to do this, and what are the real consequences?

At the time of the settlement, Google stated, “We’ve always believed our founder-led approach gives us the freedom to make long-term bets, like Android, Chrome and YouTube, that benefit consumers and shareholders alike.”

Perhaps it is time to take a step back. Google can surely solidify control with its founders in other ways.

Google’s board should consider the long-term effects of this class of stock, not only on the ability of the company to find leaders for its future but also on the psyche of its founders. Even for the gods of Silicon Valley, it may be good to set limits.