Peloton, a company in which my firm is a sizable shareholder, has lost $40 billion in stock-market value in less than a year—a pitiful example of a founding team that built a great brand and then squandered its potential under the thumb of an inept and conflicted founder who continues to wield outsize influence and power.
laid off 2,800 employees on the same day its board approved hiring a retired individual to lead the company, offering him one of the most handsome pay packages in all of corporate America. Since then, a steady drumbeat of bad news has emerged from the company, further compromising its ability to thrive as a stand-alone business. The stock has plunged about 45% after first surging on news of the new CEO.
The root cause? Poor leadership by Peloton’s founding CEO, John Foley, who is impervious to any oversight by Peloton’s board, given his large block of 20-to-1 super-voting shares (shares he has been selling aggressively as of late, further impacting shareholders).
There’s a misconception among some entrepreneurs that answering to shareholders is incompatible with the long-term innovation and freedom required to build truly transformative, category-defining companies. This has led to an increasing number of venture-backed companies—not only Peloton, but other household brands like Snapchat,
among many—who have gone public with dual-class and other share structures that enshrine founders’ outsize control forever.
But, as the market continues to prove, dual-class structures lead to weak boards and bad governance.
My firm has criticized Peloton’s leadership but remains a shareholder because we believe there is precedent for Peloton to eliminate its dual-class structure as well as compelling legal arguments, since Foley has been pledging or selling a substantial number of his super-voting shares.
Under “one share, one vote,” an independent Peloton board would have almost certainly replaced Foley long ago. Instead, Foley has “failed up” and appointed himself executive chairman.
Beyond just Peloton, what can be done to stop the massive value destruction wrought by dual-class structures?
Investors have at least two paths out. Today, over half of public equities are held passively through index funds, making it impractical for most investors to vote with their feet. Index fund managers increasingly recognize their responsibility to push companies on ESG-related issues.
It’s time that the major index providers, which determine which companies join an index, take a stand by excluding companies with dual-class structures from their indexes and denying them the valuation and liquidity benefits of inclusion.
It was welcome news when Standard & Poor’s announced in 2018 that the S&P 500
and its other market-leading indexes would not admit any more companies with dual-class structures. S&P should build on this precedent and replace all remaining dual-class companies across all of its indexes. Other leading index-setters would quickly follow suit.
While this might impact the value of Peloton shares, we believe it is the right thing to do. We would also expect Peloton to respond by abolishing its dual-class structure, which we believe would immediately boost the stock price. This would also allow the board to credibly commit to undertaking a strategic review to sell the company – which we have advocated for.
There is also a legislative solution. In the U.S., corporate law is set on a state-by-state basis, with Delaware being the favored place of incorporation for publicly traded companies. Delaware’s General Assembly should lead the way out of this morass by amending state law to require that no multi-class share structure be valid for more than three years after a company’s initial public offering, unless every class of shareholders votes to extend the period on a one-share, one-vote basis.
The Council of Institutional Investors—a nonprofit led by senior officers of major state retirement systems and pension plans—advocated a similar change in 2019.
Efficient public capital markets have helped entrepreneurs build the most vibrant and successful companies in the history of the world – and made those entrepreneurs fantastically wealthy. But when founders break the most fundamental compact with their shareholders – one share, one vote – too often things end badly.
For the sake of these companies’ shareholders, employees and founders themselves, we must now put an end to dual- and multi-class share structures.
Jason Aintabi is the chief investment officer of Blackwells Capital, a New York-based alternative investment manager that owns just under 5% of Peloton.