Dual-Class Shares and the Migration of Corporate Democracy

The debate over dual-class shares is usually framed in familiar terms. Proponents argue that unequal voting protects founder vision and long-term strategy. Critics warn of entrenchment and the erosion of corporate democracy. But this framing may miss a deeper development. The rise of dual-class structures, rather than simply weakening shareholder democracy, redistributes it. Control is concentrated at the firm level, while accountability migrates outward to markets, intermediaries, and institutional gatekeepers.

For much of modern American corporate law, the principle of “one share, one vote” has operated as the normative foundation of shareholder democracy, reflecting the assumption that voting power in public corporations should generally correspond to economic ownership.   Although U.S. corporate law, including Section 151 of the Delaware General Corporation Law, has long permitted deviations from strict voting equality through mechanisms such as dual-class share structures, those arrangements were historically associated with a relatively narrow category of firms, including family-controlled businesses and media companies. In the last few decades, however, dual-class capitalization has become increasingly common, particularly among technology issuers entering the public markets, including Alphabet, Meta, and Snap. This development has generated renewed debate among corporate law scholars and market participants over whether founder-controlled governance structures are compatible with the accountability norms traditionally associated with public-company status.

Much of the criticism directed at dual-class governance proceeds from the concern that unequal voting rights weaken the disciplinary function ordinarily performed by shareholder voting. Under a typical dual-class structure, founders and insiders retain high-vote shares that allow them to exercise effective control despite holding a minority of the firm’s economic interest, while public investors hold low-vote shares with limited capacity to influence corporate decision-making. Critics argue that this separation of voting power from economic ownership increases the risk of managerial entrenchment and reduces accountability to outside shareholders over time. Lucian Bebchuk and Kobi Kastiel, for example, argue in The Untenable Case for Perpetual Dual-Class Stock that while dual-class may be defensible in early years, indefinite control magnifies agency costs over time. Snap’s IPO, which issued non-voting shares to the public, crystallized fears that corporate democracy was being hollowed out altogether. 

At the same time, the persistence and continued market success of many founder-controlled firms complicates the conventional claim that dual-class structures simply eliminate meaningful accountability. The separation of cash-flow rights from control rights is often defended as economically rational. Concentrated voting control can protect management from short-term market pressures and enable firms to pursue long-horizon strategies that dispersed shareholders may be unwilling to tolerate. Empirical evidence on the long-term performance of dual-class firms remains contested, but the continued prevalence of such structures among major technology issuers suggests that at least some investors are willing to tolerate diminished voting rights in exchange for access to firms perceived to possess valuable founder-specific leadership or innovative capacity.

More importantly, however, the modern governance landscape increasingly suggests that accountability in public corporations may operate through mechanisms other than direct shareholder voting. Even where founders remain insulated from conventional proxy contests or removal threats, they continue to depend heavily on access to institutional capital, favorable index inclusion, analyst confidence, and broader market legitimacy. The relevant question, therefore, may not be whether accountability disappears under dual-class governance, but whether it is increasingly mediated through external market institutions rather than exercised directly through shareholder suffrage.

One of the clearest illustrations of this shift can be seen in the role increasingly played by index providers in shaping governance outcomes for dual-class firms. Historically, questions concerning voting rights and internal governance arrangements were treated primarily as matters of private ordering between issuers and investors, with stock exchanges and corporate law supplying only broad structural constraints. The backlash that followed Snap’s 2017 IPO, however, demonstrated that governance norms in modern capital markets are increasingly enforced not only through shareholder voting, but also through control over access to passive investment flows. Shortly after Snap issued non-voting shares to public investors, S&P Dow Jones announced that companies with multiple share classes would be ineligible for inclusion in certain flagship indices, including the S&P 500. Also, proxy advisory firms and institutional investors adopted governance screens in response, such as recommending a vote against directors for all companies with unequal voting rights. This remains the case despite the recent attempts to curtail the influence of some of these institutions. These decisions are significant because index inclusion and proxy advisory firms now play a central role in determining institutional capital allocation in an era increasingly dominated by passive investment strategies.  

The disciplining role played by institutional investors further illustrates the extent to which governance influence in modern public markets increasingly operates outside traditional shareholder voting mechanisms. Even where founders retain effective voting control through high-vote shares, large asset managers continue to exercise substantial influence through stewardship practices, engagement campaigns, and the broader signaling power associated with institutional legitimacy. BlackRock, Vanguard, and State Street collectively hold significant economic stakes across most major public issuers, including founder-controlled technology firms, and have in recent years expanded their public emphasis on governance oversight, board accountability, and shareholder rights. Although these institutions may lack the voting power necessary to remove controllers directly, their ability to shape market perception and governance expectations nonetheless creates meaningful constraints on managerial behavior.

As scholars such as John Coates have observed, the growing concentration of equity ownership in large, diversified asset managers has transformed the channels through which corporate governance pressure is exerted. Exclusion from a major index may therefore reduce liquidity, diminish institutional ownership, and increase a firm’s cost of capital over time, even where the company remains insulated from direct shareholder voting pressure. In this sense, index providers, proxy advisors, and institutional investors increasingly function as quasi-regulatory actors capable of imposing governance consequences on firms that depart too sharply from prevailing shareholder-rights norms.

At the same time, these market-based governance mechanisms should not be understood as perfect substitutes for traditional shareholder voting, even though they may still impose meaningful constraints on founder-controlled firms. The influence exercised by index providers, proxy advisory firms, and institutional investors operates through channels that are more indirect and institutionally mediated than the classic model of shareholder democracy. Index exclusion, for example, is likely to exert its strongest influence at the IPO stage or during periods in which firms remain especially sensitive to institutional demand and valuation effects, whereas mature firms with substantial market power may prove more resilient to such pressures.

Institutional stewardship similarly depends less on the threat of electoral displacement than on sustained engagement, reputational signaling, and the broader importance of institutional legitimacy within public capital markets. Large asset managers continue to wield considerable influence because founder-controlled firms remain dependent on stable institutional ownership, favorable analyst perception, and long-term access to capital. Proxy advisory firms such as ISS and Glass Lewis reinforce these pressures by shaping governance norms and informing institutional voting behavior across large segments of the market. 

Nevertheless, because these mechanisms rely on persuasion, market signaling, and capital allocation incentives rather than direct removal power, they operate differently from traditional voting rights and may vary in effectiveness across firms and market conditions. The significance of these developments, however, lies precisely in the fact that accountability in modern public markets increasingly appears to function through a broader ecosystem of institutional intermediaries rather than exclusively through direct shareholder suffrage.

None of this eliminates the governance risks. Perpetual control without sunset provisions can magnify agency costs. Fiduciary litigation, while available, operates ex post and cannot substitute fully for voting rights. The concern that public shareholders may become passive capital providers rather than corporate participants is real.

But the sharper question may be this: what does “corporate democracy” mean in markets increasingly defined by institutional intermediation? If shareholder voice is already exercised primarily through asset managers and index providers, the marginal democratic loss from dual-class structures may be smaller than critics assume. Conversely, the power of private gatekeepers to determine governance norms may itself raise democratic concerns of a different kind.

The future of corporate democracy may therefore depend less on restoring strict voting equality and more on ensuring that these external accountability mechanisms remain transparent, competitive, and responsive. If governance is migrating from the firm to the market, the real question is not whether democracy survives dual-class structures, but where it now resides.     

Chima Uzochukwu-Obi is an LL.M. candidate in Corporation Law and a Hauser Global Scholar at NYU School of Law. He previously practiced corporate and finance law in Nigeria and writes on corporate governance and capital markets. In addition to being a Graduate Editor at the NYU Journal of Law and Business, Chima is also a Graduate Student Research Fellow at the NYU Pollack Center for Law and Business.