Shared Concerns Of The Board: Fill & Download for Free

He’s not as rich as people think. The bulk of his value is in special class A voting shares (GOOGL). He and Sergey together own the majority of Google voting rights. Although they are ultra rich on paper, if they ever tried to realize a substantial amount of that wealth, they would lose control of Google. And the stock price would plummet. And Google would not be the same with greedy corporate interests on the board.This is what concerns me with Elizabeth Warren’s campaign. She would force Larry to sell 3% of his ownership each year. Whether the stock and voting rights are transferred to the government or to the highest bidder, the control of the company would be diffused. In such an environment, Larry and Sergey could never have founded an innovative company like Google. They would have had to have given up way too much control to random outside investors.

Anonymous has written a very good answer to the question (although I’m puzzled as to why s/he feels the need for anonymity.) What I would add to that is a little more background in the context of early stage, privately held companies (which is what I have a feeling the questioner is concerned about.)As Anon noted, at a fundamental level, Common shareholders of the company, by majority vote, “control” everything about the company. But because you obviously can’t have every shareholder voting on every single decision, the shareholders elect a Board of Directors to represent them in controlling the company. But because the Board of Directors are not engaged in “controlling” the company on a full-time basis, they hire a full time, Chief Executive Officer to manage the company on a day-to-day basis (“executing” the will of the board), and that CEO in turns hires a senior management team, who hire subordinates and so on down the line.On top of that, there can be (but don’t have to be) Preferred shareholders, who own different types of shares than the Common holders. Preferred shares have first call on the assets of the company in case of liquidation (such as going bankrupt, or being sold) before the Common, but they are limited in value to the fixed price that was paid for the shares. After that amount gets paid back, everything else is divided up equally among the Common stock. In addition, because each “class” of Preferred stock can be treated separately, when that stock is originally created it can be set up with certain specific rights and privileges, such as the right to require a majority of that class’s holders to approve any sale of the company.Sidebar: You can therefore see that in a “bad” case, if there’s any value left at all, the Preferred get some or all of their money back, and whatever dregs remain (if any) are divided among the poor Common holders; but in a “good” case, the Preferred get only their original money back, and all of the ginormous gains are divided among the rich Common holders. Because of that, venture capital investors (who are pretty smart cookies) don’t buy either Common or Preferred. Instead, they create something called “Convertible Preferred” stock, which has the delightful, chameleon-like ability to act like Preferred stock in the bad case, but—abracadabra—turn into Common stock in the good case. Just saying.One way to visualize this is to think of two pyramids stacked on top of each other:Control goes from the top down, and any power held by anyone lower on the chart must—by definition—have been ceded to them by the folks above them. Soooo…the shareholders start with all the power, but can give the company the ability to create new classes of Preferred stock, which may have various special features like blocking rights, super votes on certain issues, etc. The shareholders (typically with all flavors voting together) then vote to elect a few people as the Board of Directors, and give the Board almost complete power to run the business (by majority vote), subject only to requiring an approving vote by the shareholders for really big things (like selling the company.) The board then hires a CEO to run the company, approves her plan for the year (along with the associated budget), and then provides oversight of the CEO on a regular basis through Board Meetings, at which the CEO reports on her actions and makes proposals, which the Board approves or rejects. Other than that, the CEO from then on runs the company, hiring officers, directors, managers and the mailroom clerk. If at any time one of the players is not doing a good job, the layer above is capable of firing them. This includes the CEO, who can be fired at any time by the board if the board feels that the company is not doing as it should be, and the fault is the CEO’s.Finally, just to make this all even more confusing, privately held companies typically throw one additional ingredient into the soup: a Shareholders Agreement. This is simply a piece of paper signed by all of the Shareholders committing to vote to do specific things. Thus, for example, in the absence of a Shareholders Agreement, holders of a majority of shares in a company (whether they were investors, founders, employees, or random people on the street) would simply vote to elect whomever they wanted to the Board…and thus control the company. But… a more likely occurrence is that every one of the Shareholders signs an agreement saying that:“regardless of who owns however many shares, we all agree that we will cast our votes so that the Board ends up consisting of Jane Q. Founder, one director nominated by Vanity Ventures, and one independent director agreed upon by the other two.”Whew. OK, now that you know the theory behind corporate governance, let us count the myriad ways that Engelbert Humperdinck can “control” a company:He can own 51% of the common shares and elect the whole boardHe can own 51% of a class of preferred shares that have built-in control rightsHe can have everyone sign a Shareholder’s agreement in which they agree to let him decide on a majority of the members of the board, regardless of how many shares he owns.He can own 51% of regular common shares, while ensuring that everyone else owns common shares that don’t get to vote.He can negotiate a contract with the board to be CEO, with a contractual provision saying that if the board fires him they need to pay him a billion dollar severance fee…and since they company doesn’t have a billion dollars, they therefore can’t fire him.And about a jillion other ways that smart lawyers and executives can push, prod and tweak things.In the case of Mark Zuckerberg, he’s done a combination of several of the above, including 2, 3 and 4 (Facebook Investors Are Cool With "No Vote" Shares).At the end of the day, however, corporate governance comes down a real politik game in which the party with the power (typically economic) gets to control the play, regardless of what the documents say.(As an exercise for the reader, we will let you figure out why, when Donald Trump’s casino ran into the ground and went into bankruptcy, then-Mr. Trump was able to negotiate an exit in which the creditors (whose money he had just lost) would continue to pay him a $2 million annual salary, and a “consulting fee” of $600,000 every year for the rest of his life.)

I was the President at one time of a HOA for a small development consisting of 28 townhomes. It was 10 buildings with either 2 or three units in each building. There was some “common area” (i.e., grass) in between the buildings, a community swimming pool, and 5 septic tanks shared between the buildings.I have so many horror stories.When my wife and I moved in (our first house), we got a letter a few months later inviting us to the annual homeowners’ meeting, and felt it was our duty to attend. We went to a property manager’s office one evening after work, where we met an older couple, an older gentleman, and the woman who was the property manager (we pretty much kept to ourselves, and so did our neighbors, so these were people from other buildings that we hadn’t managed to meet before).First order of business was electing the board of directors. The property manager looked at me and said, “Would you be interested in being an officer of the board?” I wasn’t really expecting the question, so I said something along the lines of, “I guess so.” So she says, “Great, you’re the new Secretary. Barry here is the President, Doris there is the Vice President, and I’ll continue to be the Treasurer.” That was the entire meeting. In retrospect, it wasn’t even a legal meeting because we didn’t have a quorum, even with proxy notes.A year or two later, Barry sold his property, and I moved up to Vice President. A year after that, I accepted the nomination as President. That’s when I started to really hate HOAs. Most of the experiences other people would tell me about their HOA was that it was a sort of nameless, faceless bunch of Nazis that imposed often ridiculous restrictions over frivolous matters - your grass is a quarter-inch too high, you can’t put a for-sale sign in your yard, you can only paint your house one of these three colors.An HOA in a tiny community like ours was is personal. This person hates that person. No one likes Fred. Mary is a drunk. We think Tom is a pedophile. This is what constitutes the official business of the HOA board at monthly meetings. People don’t come to address actual community needs, they come to gossip about their neighbors in the worst and most hurtful ways possible.Facing the inevitable budget issues, we decided to put our lawnmowing contract out to bid, to see if we could save some money. Within weeks, people started bitching that they didn’t like the way the grass was being cut, and we needed to fire the company and get a new one. Never mind that we’d just done that, and taken the lowest bidder to avoid having to raise everyone’s fees, or that as far as I was concerned, they were doing a perfectly adequate job.We had one woman who lived in the farthest-back unit of the farthest-back building, where the community property bordered on some undeveloped green space (woods). For whatever reason, when the developer had built the place over 15 years earlier, they had erected a short run of wooden fence there. It didn’t enclose anything, it just drew a border along maybe a 30-foot section of the property line. Anyway, this woman would come to the meetings and request that the HOA replace the fence, because it was starting to rot, and the trees and vegetation on the other side of it were starting to encroach on it and knock it down. For two years she would show up, and more and more boldly demand that we replace the fence. Finally, I had to stand up, point to the 10 or so other homeowners, and tell her to her face that she needed to convince everyone why they should pay to replace a fence that only she got any benefit from (if there could even be a benefit to having a straight fence that didn’t enclose anything), and that she could just stop asking, because the answer was always going to be “no.”People always demanded things like new pool furniture, or adding new trees and shrubs to beautify the property, as if we could just snap our fingers and make them appear. We paid about $100/month in HOA dues, for the operation of the pool and lights, maintaining the common property, and maintaining the septic tanks. At one year’s budget meeting, the property manager and I were frustrated by the inability of the board to approve a $1.50 per quarter increase of the fees, and the property manager had to go back and re-work the budget to figure out where he could cut a few hundred bucks over the course of the year because the rest of the board were cheapskates who couldn’t accept that prices of everything go up over time. This was during the time when gas went from like $1.40 to $3 a gallon, back in the early 2000’s. So, of course lawn service companies who use a lot of gas-powered equipment had to raise their prices.I resigned as President one year for the mere reason that one member of the board felt it was improper of me to have the Vice President chair a meeting for me. I mean, I was only leaving town that afternoon because my wife’s grandmother had been murdered in a fucking home invasion robbery that morning, and it was apparently insensitive of me to not be at the meeting to give my own vote on picking yet another fucking landscaping company (the third in three years, because this woman kept insisting that every one we had was terrible). After I cursed her out on the phone, took a deep breath and called the property manager to explain that I wouldn’t be able to attend the meeting that night, why, and that I was immediately resigning. He was very sympathetic.A couple years later, the board fired that property manager, because the woman that came in to fill the vacancy I left said she thought she could do the job as good as he could. Two months after that, the board came knocking on my door, clutching the HOA’s bank statements in one hand, and the monthly financials sheet in the other. “Jerry embezzled over $30,000 from us!” I was just astonished… mostly because I couldn’t see Jerry as having embezzled anything. After a few minutes looking at the paperwork, I couldn’t help but laugh. For years, we were keeping reserve accounts for various repairs and improvements; mainly, there was a reserve for pool repairs, a reserve for common area repairs and improvements, and, most importantly, a reserve for septic repair or replacement. I say “most importantly,” because shortly before we had moved in, one of the septic tanks had failed, and they had had to have someone come in and perform a very expensive procedure called a “terra-lift” or something, to the tune of about $8K. The county, it was rumored, was waiting for another failure to come in and condemn the whole development as unfit for habitation due to sanitary/health reasons. This was just after the county had completed a huge project to put a new sewer line along the major road adjacent to our property, and we were given an offer to be connected to the county sewage system for $10K per unit (which they would spread out over 10 years as a special assessment to our property taxes), which the board, in their infinite wisdom, rejected. When they started having problems with a septic tank later (after we moved), they had reportedly gone back to the county to inquire about connecting to the sewer, and that cost had gone up to $40K per unit. For reference, we bought our unit in 1999 for $53K).In any case, the reason for my laughter was that none of them understood accounting, so they had been misunderstanding the balance sheet. Even the people that had been on the board for years.See, the line items for those reserve accounts looked like this:Amount due to Reserves for Septic Replacement . . . . . . $12,346Amount due to Reserves for Pool Repairs . . . . . . $11,893Amount due to Reserves for Common Areas Improvements . . . . . . $8,455Since before I had gotten there, the board had been making yearly budgets, earmarking money for these reserve accounts, and then due to the inability to get anyone to accept increases in the quarterly dues (not to mention the people who were delinquent and weren’t being penalized with late fees), they were allocating those funds for operating expenses, and in good accounting fashion the amount that was supposed to be put into the reserve account was debited and listed as the amount due to the reserve account. In other words, the HOA owed itself nearly $30K, but these chuckleheads had voted to spend some money on new pool furniture or something, went to the bank, and found that we didn’t have $30K sitting in the bank. The first reaction was, “Jerry embezzled it!” There were some sad, sad people that day, when I was done explaining the basics of accounting to them, and how their insistence over the years that we don’t raise the dues or impose late fees and interest on people behind on their payments was the reason we were $30K in the hole, and in dire straits if an emergency ever hit.