29. Controlled company (definition)

NOTE: if you’re new to Ground-Up Governance, or are finding anything a bit strange or confusing, you might want to START HERE.

Remember that in most cases every share has one vote, right?  That means that if you have one share and one vote – even if there are 100,000,000 other votes – you can still participate in corporate governance, but you just don’t have much authority on your own.  In fact, in some corporations, a single person or corporation might have 50,000,001 votes and so they always get their way no matter what the other shareholders want.  These are called “controlled companies” because their governance is ultimately controlled by an individual person or organization. 

So, basically up until you sell a majority of your shares in Reallie Steilish, it means your corporation is “controlled”.  Controlled by you, that is.  If you have shareholders you probably want to listen to them, even just because they might have good ideas.  But for the most part you can ignore them unless they know something important that you don’t.

If you need more money and want to SELL a majority of your shares, there’s also a cool trick that will let you keep on being a controlled corporation.  Some business owners create multiple “classes” of shares and give some share classes more votes than others.  You can even decide that one class of shares will get NO votes, sell those shares to other people, and then keep the voting class of shares to yourself.  That way, you really only need ONE share out of 100,000,000 and you still have a controlled company.  Pretty cool, right?  Corporations with that type of structure are usually called “dual-class” or “multiple class” corporations.  Dual-class corporations aren’t allowed in every sector, or everywhere in the world, so make sure you double check first. 

Controlled companies are especially interesting if they are publicly-traded because that means people are interested in owning shares even though they don’t really have any governance authority.  Curious, right?  Seems weird that someone would choose to buy shares and NOT have governance authority when they could buy shares in ANOTHER company and have both stock AND governance authority.

In fact, there are some people who are REALLY cynical about dual-class corporations in particular.  If you think about it, a dual-class structure usually means that one person or organization has all the governance authority, but if the corporation’s performance is bad they only lose a little bit of money because most of the shares belong to other people (who lose a LOT of money if the corporation is bad). 

In reality, it’s not all black and white.  It turns out that there are lots of high performing dual class companies out there. Some of them have had awesome performance for a really long time (like, generations…seriously!), which helps to explain why people want to own shares in those corporations.  So, it turns out a lot of that cynicism is probably just grumpiness.  Lots of dual-class controlled corporations are great, and lots of single-class widely-held corporations are awful, and vice versa.