CEO Turnover at Dual-Class Firms
Dual-class structures remain a hotly contested topic in corporate governance. Over the past two decades, the use of dual-class structures has expanded significantly, particularly among venture capital (VC) backed tech companies. Critics contend that high-vote shares increase agency costs and entrench underperforming executives. Proponents argue that dual-class structures shield founders from short-term market pressures, preserving […]
Yifat Aran is an Assistant Professor of Law at the University of Haifa School of Law, Brian Broughman is a Professor of Law at Vanderbilt University Law School, and Elizabeth Pollman is a Professor of Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. This post is based on their recent paper.
Dual-class structures remain a hotly contested topic in corporate governance. Over the past two decades, the use of dual-class structures has expanded significantly, particularly among venture capital (VC) backed tech companies. Critics contend that high-vote shares increase agency costs and entrench underperforming executives. Proponents argue that dual-class structures shield founders from short-term market pressures, preserving their ability to pursue innovation and long-term growth. As a form of compromise, the current policy debate largely focuses on sunset provisions that would convert high-vote shares to single-vote shares after a set period or upon certain triggers. But regardless of their stance on dual-class structures’ merits, most participants in the debate have assumed that dual-class structures entrench founder-CEOs.
In our working paper, “CEO Turnover at Dual-Class Firms,” we analyze CEO turnover at U.S. VC-backed firms that went public between 2002 and 2020. Our findings reveal that CEOs at dual-class firms generally remain in their roles longer post-IPO compared to those at a matched set of single-class firms. However, once we account for the higher rate of M&A sales of single-class firms, this gap in CEO tenure largely disappears. More specifically, despite dual-class CEOs holding, on average, three times more voting power post-IPO than single-class CEOs, their risk of being replaced internally – where the board replaces the CEO or the CEO resigns – is not significantly different. Further, contrary to expectations, we find no evidence that a larger gap between voting rights and economic ownership reduces turnover risk. Both single- and dual-class firms are more likely to replace their CEO, whether voluntarily or involuntarily, following poor shareholder returns, and this performance sensitivity persists regardless of the CEO’s voting power—suggesting that market accountability mechanisms remain active even in dual-class structures.
