Imagine a world in which Google is a smaller private company, not the global behemoth Alphabet is today. Surprisingly, it almost happened. Google co-founders Sergey Brin and Larry Page were hesitant to go public because they feared that sharing control of the company with shareholders would force them to do things they didn’t want to do. A chance meeting with Warren Buffett changed their minds. Buffett explained the two-tier stock structure that he used to retain control over Berkshire Hathaway, even though he did not own most of its stock. Brin and Page realized they could use a similar approach to keep control of Google, and when they launched their IPO they modeled their stock structure on Berkshire’s.
That revelation comes from the book Super Pumped: The Battle for Uber by Mike Isaac, which came out in 2019, but is getting a lot of attention these days as the basis of a new Showtime series. Isaac, a longtime tech reporter for The New York Times, writes a lot about Silicon Valley in general in his book. In it, he recounts what an unnamed investor told him: that even as Google grew under their leadership, along with that of CEO Eric Schmidt, Brin and Page resisted an IPO because they feared the loss of control that could go with it.
But when they met the Oracle of Omaha and talked about their reluctance, Buffett explained the system of Class A and Class B shares he used at Berkshire Hathaway. A shares, owned by Buffett and some others, carry one vote per share. B shares only carry 1/10,000 vote per share. This means the company can sell shares to investors but remain protected from activist shareholders and hostile takeovers.
Even though such classes of shares were unusual in the tech industry, Brin and Page decided to copy the structure. In Google’s case (now Alphabet), A shares carry one vote, while B shares each carry 10 votes. Brin and Page between them own 51 percent of those B shares, giving them joint control of the company, even though they own less than 12 percent of its total shares.
They also copied another tactic of Buffett’s–before their 2004 IPO, they laid out their philosophy in a letter titled “‘An Owner’s Manual’ for Google Shareholders” which they freely admitted was largely inspired by Buffett’s 1996 “Owner’s Manual” for Berkshire shareholders.
In their letter, Page and Brin talked about their leadership philosophy and their concerns about the outside influence of shareholders. They wrote:
“As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to ‘make their quarter.'”
The co-founders went on to explain that they might take actions that they believed were in the long-term interests of the company and its shareholders, even though those actions might cause profits and share prices to fall in the short term. “We would request that our shareholders take the long term view,” they wrote.
You know the rest of the story. Google shares went public at $85 a share and, after a two-for-one stock split in 2014, each of those original shares is worth well over $5,000 today. Brin and Page are still serious about retaining control, so much so that they split the stock by creating a new class of C shares that have no voting power at all. People who had either A or B shares at the time of the split got one non-voting share for every voting share they held. Investors keep buying Alphabet, and Berkshire Hathaway too, even without much voting power, because those companies continue to be very good investments.
The thing is, Brin and Page, and Buffett too, were right to insist on retaining control. Activist shareholders and investors have often made the argument that management’s most important role is to maximize shareholder value. I myself disagree–I think great managers do serve the interests of investors, but also those of customers, employees, and the community at large. But even if you accept the notion that managers should only serve shareholders, which shareholders do you mean? Those who hold the stock for a month or those who hold it for a decade? Unfortunately, it’s all too easy for short-term shareholders seeking quick wins to force their will onto the leaders of public companies. With multiple classes of stock, the founders of Alphabet, and Berkshire Hathaway too, have made sure they can best serve those who plan to be shareholders for years to come.