Within the field of corporate governance, few issues inspire as much fervor from critics as the use of dual-class or multi-class share structures at certain companies. In recent years, proxy advisory firms and other self-proclaimed good governance advocates have increasingly embraced the ‘one share, one vote’ approach while castigating companies with dual-class stock.

But our new, original analysis suggests that perhaps dual-class shares are far from the malignant tumor its critics would have you believe. One has to question whether self-anointed governistas seeking to impose single-share structures on all companies are overreaching in their zeal for a universal, one-size-fits-all solution when the reality is far more nuanced.

Dual-class shares haven’t always been so unloved, and a brief historical overview is warranted. Despite the pendulum swinging far in favor of single class shares and away from dual class shares in recent years within the governista crowd, a review of academic literature from corporate governance scholars and practitioners over the last three decades reveals that this is a divergence from the historical norm, which has long held there is no one best way. Studies from sources as varied as The Harvard Business Review, Deloitte, The Institute of Directors, Corporate Board Member, MSCI, Dartmouth University, The University of Florida [here], and The University of Singapore, all acknowledged both benefits and disadvantages of dual and multi class shares.

As critics like to point out, the disadvantages identified by these studies are obvious – dual class shares create an inferior class of shareholders; can increase the likelihood of related-party transactions; diminishes independent/non-executive board leadership; provides fewer checks and balances by more easily allowing for entrenchment of existing management and board; and could potentially deter institutional ownership and impair access to debt and equity markets.

But these studies also identified some little-understood advantages of dual class shares: for example, they facilitate easier execution of strategy; insulate the firm and management from short-termism, including activist shareholders; protects firms making capital expenditures with long pay-off horizons, and attracts the right kind of institutional investment partners with long-term investment horizons.

Our own analysis provides more evidence for the historical consensus that there is no single best way or one-size-fits-all solution. We evaluated the stock performance of all companies in the Russell 3000, through October 3, 2024, separating out the 244 companies with dual class or multi class share structures against the remaining companies with single class shares.

The results were surprising. We found that companies with dual and multi class shares, on average, outperformed the companies with single class shares across both the short and long-term. (all averages are annualized and calculated on an equal-weight basis)

• Over the past one year, companies with dual and multi class shares have returned 35.82% vs. 31.36% for companies with single class shares.
• Over the past five years, companies with dual and multi class shares have returned 9.05% vs 8.12% for companies with single class shares.  
• Over the past ten years, companies with dual and multi class shares have returned 8.19% vs 7.45% for companies with single class shares.

Our fresh quantitative analysis dovetails with prior research; going back 20 years, many studies have demonstrated how dual and multi class stocks outperform single class shares over both short-term and long-term time horizons.

This outperformance is not just the product of overweighting any one sector. Although it is easy to associate dual class shares with new, buzzy technology IPOs; in fact, our analysis found that many of the most 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, and not just technology.

In evaluating dual-class share companies that have consistently outperformed; while we acknowledge no two situations are alike, there are some common patterns which emerge. Some common scenarios when dual-class shares seem to work especially well include:

• When sui generis founder/owners are highly personally engaged with record of success (such as Warren Buffett at Berkshire Hathaway and Michael Dell at Dell)
• Control shares pass to family/descendants of the founder; but they have significant industry/company expertise with demonstrated successful track record of leadership before assuming principal roles (such as the successful transition from Ralph Roberts to his son Brian Roberts at Comcast)
• Control shares pass to family/descendants of the founder without industry/company expertise; but family entrusts competent professional management team without unwanted interference/meddling (such as at Hyatt and McCormick & Co.)

However, contrary to popular perception, dual class shares are ultimately NOT just a bet on the sui generis nature of an irreplaceable founder/controller or the quality of a management team. Even beyond leadership, we found there are common scenarios where dual-class shares seem to work for structural business reasons:

• In certain highly cyclical industries where inevitable, steep cyclical downturns periodically create profiteering opportunities for activist investors and hostile raiders if not for dual-class shares, in cyclical sectors such as financials and consumer discretionary. For example, 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.
• An ethos of long-term value creation is embedded in the company culture vs. short-term profiteering – allowing for stronger capital allocation decisions, re-investment into the business, and/or ESG prioritization. For example, 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 the company’s 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.

Of course, as critics note, and as is inevitable with any governance structure, dual-class share structures do not always succeed – though, curiously, none of the most notorious corporate collapses and scandals took place at companies with dual-class shares. Each of 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; not to mention non-publicly traded collapses at FTX and Theranos. Nevertheless, in reviewing situations when dual-class shares turn ugly, we found some common, repetitive pitfalls and red flags:

• When founder/owners have a reputation for self-enrichment and/or using the company as a personal piggy bank (for example, former CEO Conrad Black of Hollinger International was indicted for fraud after diverting company assets and resources into his own hands)
• When founder/owners age into infirmity but refuse to relinquish control (for example, Sumner Redstone refusing to step down at Paramount/Viacom until after multiple legal challenges and court intervention)
• When ill-prepared descendants of founders take over companies without any experience/background
• When descendants of founders needlessly meddle with professional management teams
• Destructive family infighting which leads to ugly fissures and splits within control share blocs and/or on the board
• When controlling owners prioritize short-term profit-taking and cash-outs in lieu of investing for the long-term success of the enterprise

In light of these common pitfalls, it is worth noting that a company’s optimal share class structure is far from permanent, and can change with time. There are many current situations, closely resembling the common pitfall scenarios laid out above, where boards have correctly concluded that dual class shares might have made sense for those companies at some point in its history, but not anymore. For example, Lionsgate established a dual-class structure after its acquisition of Starz in 2016, but now that Lionsgate is spinning off Starz, Lionsgate is now collapsing its erstwhile dual-class share structure, heeding the wise encouragement of constructive, engaged shareholders after a prolonged period of poor market performance and rumors of intra-board squabbling. Similarly, beer maker Constellation Brands smartly collapsed its dual-class share structure after a major speculative bet on marijuana gone wrong and other questionable capital allocation and management decisions fueled the stock’s underperformance against peers.

In evaluating the outperformance of dual class shares and in evaluating common scenarios where dual class shares work especially well, balanced against common pitfalls, the evidence is clear that for companies, there is no single right answer between dual class, multi class, or single class shares. It is all situational, dependent on a company’s circumstances, the demonstrated caliber of their leadership, and the environment in which they operate. Just as dual class shares are not the right structure for all companies; dual class shares can make sense for certain companies, in certain scenarios. These crucial nuances are often lost in what has increasingly become the single-minded zealotry of ‘one share, one vote’ advocates, seeking to impose single class structures on all companies irrespective of circumstance.