Et tu, Google?

April 27, 2012: 11:52 AM ET

Google's founders recently announced a new corporate structure designed to perpetuate their grip over the company. Everyone should beware.

Google CEO Larry Page

Google CEO Larry Page

FORTUNE -- Google's founders announced a plan designed to perpetuate their ironclad grip on the long-term governance of the company.

With the board's blessing, the company will issue a new non-voting class of shares to existing shareholders. Because the founders currently hold majority-voting rights, the plan does not require that shareholders give their consent to the dilution of their future voting power. The action comes amid ongoing stock sales by Google's (GOOG) founders.

While this edict by the founders is important to Google stockholders, users of Google's products, and owners of other stocks -- outright or in mutual funds or retirements savings plans -- should also beware.

Other technology firms, like Facebook, and financial firms, like Carlyle, are attempting to gain access to public market funding without giving shareholders a mechanism to keep the founders accountable. In a conference call with analysts on April 12, Google CEO Larry Page took credit for a similar lack of voting rights at other companies. "Given Google's success, it's unsurprising this type of dual-class governance structure is now somewhat standard among newer technology companies," he said.

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But not everyone buys the "if everyone is doing it, it must be a good idea" argument. Even those with short memories can recall the tech boom and bust at the turn of the last decade, or the financial crisis we are still digging out of.

Google's founders marshaled the best possible arguments for their plan in a letter to shareholders. Taking a swipe at shareholder governance, they argued that evading shareholder mandates was the best way to keep the company focused on the long term.

The founder's invocation of the long term was genius. After all, no one in her right mind goes around saying we believe in the short term and the long term be damned. People may act in favor of their own short-term selfish interests but saying so is an inevitable invitation to cries of foul play.

So it isn't too surprising that the founders' arguments have convinced some. With Google, shareholders are buying their founders and their ability to create value, says Rob Jackson, a professor at Columbia Law School. While shareholders may have expected the founders to loosen their control over time, they "went into the stock with their eyes open," he says. More

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