In another recent column, Bloomberg columnist Matt Levine spelled out the problem with multi-class share structures. This is why we’ve filed shareholder proposals at Goldman Sachs and JPMorgan Chase asking them to explain how their underwriting of multi-class IPOs harms their diversified shareholders. Describing the arrangement at Peloton Interactive, Levine notes CEO John Foley ”controls a large block of super-voting stock, and along with his co-founders and fellow senior executives he has a majority of the voting stock.” Levine continues:

“This makes shareholder activism somewhat challenging. If you are an activist and you do not like Peloton’s management, you can put together a zingy deck about how bad the managers are and how much money they are costing shareholders, and you can present it to Peloton’s board of directors and urge them to fire the managers, but the board’s hands are somewhat tied because, if they fire the managers, the managers — as controlling shareholders — can fire them right back and reinstate themselves. …

“A lot of public-company governance operates on the assumption that the shareholders are ultimately in charge. How this actually works is complicated and indirect, and we have talked about how the path from ‘shareholders want something’ to ‘company is forced to do it by legally binding mechanisms’ is winding and uncertain. But if you are an activist, everything you do takes place against a backdrop of ‘if you ignore the shareholders we can vote you out.’ Usually! Traditionally! But modern U.S. public markets increasingly have the rules of private tech startups: The founders control the company, they can do what they want, and the shareholders have no binding power to get rid of them.”

We couldn’t have said it better ourselves. It’s time for underwriters such as Goldman Sachs and JPMorgan Chase to stop enabling what the SEC Investor Advocate described as a “festering wound”:

“And there is an even larger danger, from my perspective. Namely, without an appropriate level of accountability to shareholders, it is easy to predict that this trend will not end well. Investors will be hurt, and badly, if we continue down this path. …

In my view, what we now have in our public markets is a festering wound that, if left untreated, could metastasize unchecked and affect the entire system of our public markets. The question, then, is what can be done to avoid the inevitable reckoning.”