Shopify is proposing changes to its governance structure to preserve founder and CEO Tobi Lütke’s voting power – a move one local business expert suggests could make it more difficult for common shareholders to influence management decisions in the future.
Under the new plan announced Monday, the Ottawa-based e-commerce company will issue Lütke a non-transferable founder share that will have a variable number of votes that, when combined with his other holdings, will represent 40 per cent of the total voting power attached to all of the company’s outstanding shares.
However, the founder share will sunset if Lütke no longer serves as an executive officer, board member or consultant whose primary job is with the company or if Lütke, his immediate family and his affiliates no longer hold a number of class A and class B shares equal to at least 30 per cent of the class B shares they currently hold.
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In the event of a sunset of the founder share, Lütke will also convert his remaining class B shares into class A shares.
Shopify is also proposing a 10-for-one split of its class A and class B shares.
The shakeup comes as Shopify’s stock has experienced a significant slump in recent months, after surging following the onset of the COVID-19 pandemic.
Yet Lütke – who started Shopify with an investment from father-in-law Bruce McKean in 2004, when he was unable to find e-commerce software for a snowboard business he was building – remains at the helm.
‘Unprecedented’ proposal
If Monday’s “unprecedented” proposal is approved, more control over the company could eventually be wrested away from Lütke and handed to common shareholders, said Richard Leblanc, a professor of governance, law and ethics at York University.
Shopify estimates that if the conversion were completed Monday, the total voting power held by class A shareholders would increase to roughly 59 per cent from about 49 per cent.
“This is so unique … because most of the time the founder thinks they’re going to live forever and they don’t want to relinquish control,” Leblanc said.
“There’s many companies in Canada that end up in the hands of children and other family members and there are studies that suggest that … the more you bequeath to a family member, the less effective that family member becomes because they don’t have the same experience and drive that the founder had.”
The arrangement would also prevent a power struggle from unfolding within the founder’s family like telecommunications giant Rogers Communications saw last year, Leblanc said.
Edward Rogers, the son of founder Ted Rogers, was able to replace five board members over objections from other directors, including his mother and sisters, in October because he controlled 97.5 per cent of the firm’s class A shares.
Leblanc believes more companies will follow Shopify’s lead, especially after the public Rogers battle, because “there’s an increasing intolerance by investors for absolute control by family members.”
Shopify’s proposal is the result of a board process it said was conducted under the supervision of a special committee of independent directors.
It framed the move as a way to “modernize” Shopify’s governance structure, align it more closely with long-term market opportunities and follow the company vision Lütke outlined in a 2015 public letter, where he prioritized long-term value over short-term revenue opportunities.
“I have never read a paper by any expert that says this is a good thing. The owners can keep doubling down on bad decisions, and there’s no way you can get rid of them.”
“Tobi is key to supporting and executing Shopify’s strategic vision and this proposal ensures his interests are aligned with long-term shareholder value creation,” Rob Ashe, the former CEO of Cognos who is now Shopify’s lead independent director, said in a statement.
But Carleton University professor Ian Lee said history shows that giving founders and CEOs a preferential stake in the businesses they lead can hurt companies in the long run because shareholders have less power to oust executives who make questionable decisions.
“I have never read a paper by any expert that says this is a good thing,” said Lee, an associate professor at Carleton’s Sprott School of Business. “The only people that this benefits are the family that gets the benefit of being able to control the company with the minority of the shares.
“The owners can keep doubling down on bad decisions, and there’s no way you can get rid of them.”
Lee said it should be up to the market to decide whose vision for the company ultimately prevails.
“If I see the company going down the wrong road, you do what any investor does if you don’t like the way management is running a company – you sell your shares,” he said, while praising Shopify’s directors for including a sunset clause in the proposal. “This is Intro to Capitalism 101.”
Lee noted the stock split will likely have little immediate effect on Shopify’s overall valuation. But he said it will give the e-commerce giant more liquidity by making it cheaper for less wealthy investors to buy into the firm.
Stock price in decline
“You’re making it more affordable to a larger pool of investors, which means there’s potentially more money coming into the market,” he said. “It reduces the barriers to entry.”
Lütke’s ethos of prioritizing long-term value over short-term revenue opportunities extends to the stock price. The CEO is known for requiring anyone at the office caught checking the company’s stock price during the day to purchase Timbits for their team.
Those who took a peek likely noticed Shopify’s stock has been more than halved over the last year. It sat at $785.85 late Monday afternoon, down from a high of more than $2,100 in November.
Lee said Shopify’s stock is now in the midst of a market correction after “overexuberant” investors drove up the price during the e-commerce surge earlier in the pandemic.
“This is not an indicator of weakness,” he said. “It’s just a recognition that our economy is starting to return to more pre-pandemic (patterns) where we don’t buy huge amounts (of goods) online.”
The share split requires approval by a two-thirds majority of shareholders and at least a majority of the votes cast by shareholders excluding Lütke and his associates and affiliates. The matter will face a vote on June 7.
If approved, Shopify director John Phillips will convert all class B shares held by Klister Credit Corp., a company the early investor owns with psychologist-wife Catherine Phillips, into class A shares.
– With additional reporting from OBJ staff
