Performance Leads Governance: Rethinking Dual-Class Structures through Market Reality
The debate over dual-class stock structures has long polarised scholars, regulators, and institutional investors. In his recent article, Professor Roberto Tallarita significantly advances this debate by empirically dismantling the longstanding assumption that dual-class structures reflect bespoke negotiation among sophisticated market participants. Drawing on an extensive dataset, he shows that these structures are not the result of firm-specific bargaining but instead reflect a process of legal standardisation, social norms, and market path dependency.
In our recent paper, we take up Tallarita’s argument—and advance it one step further. We agree with his critique of the traditional contractarian narrative, and we argue that the persistence and even popularity of dual-class structures reflect not a failure of governance, but rather a broader truth: investor behavior is driven not by governance formality but by financial performance and corporate mission alignment. In today’s market, what matters most is not the structure of governance, but whether that structure enables the company to deliver value and pursue its long-term mission.
From Contractarian Theory to Empirical Reality
Tallarita’s article powerfully challenges both classical and modern contractarian theories by showing that the governance terms in dual-class structures—particularly voting ratio (degree) and duration—cluster around two dominant configurations: most firms adopt a 10:1 voting ratio and either perpetual or loosely event-based sunset provisions. Despite the theoretical flexibility available at IPO, his research finds little correlation between governance design and firm-specific characteristics. This empirical clustering undermines the assumption that dual-class arrangements reflect optimal, tailor-made solutions negotiated in a well-functioning market for corporate control.
Moreover, Tallarita rightly emphasises the role of corporate lawyers in propagating standard governance templates. Rather than engaging in fresh negotiations for each IPO, legal counsel often rely on precedent models that have proven market-acceptable. In doing so, they transmit market norms that are shaped not by firm-specific optimisation but by the replication of familiar structures. The result is a market where governance innovation is the exception, not the rule.
We share Tallarita’s scepticism of the contractarian view—but we also believe that his argument leads to a deeper insight. If governance terms are neither bespoke nor varied, then why do investors continue to support firms with these structures? The answer lies not in governance theory, but in market pragmatism: investors care about returns.
The Market’s True Priority: Performance
Our central thesis is that investors consistently prioritise financial and strategic performance over governance form. Despite repeated calls from proxy advisers and stewardship codes for the elimination of dual-class stock, companies like Alphabet, Meta, and Berkshire Hathaway have not suffered market penalties for their governance choices. On the contrary, these firms have flourished—and continue to attract capital—because they deliver sustained value.
Empirical studies increasingly support this observation. Recent research, for example, finds that dual-class companies have consistently outperformed their single-class counterparts over one-, five-, and ten-year periods. This outperformance is not confined to the tech sector; it spans industries as diverse as apparel, finance, and media. Moreover, the most notorious corporate failures in recent memory—Enron, Lehman Brothers, Silicon Valley Bank—did not occur in dual-class firms, but in companies with traditional, single-class structures.
Simply put, investors are not blind to governance risks, but they are pragmatic. They tolerate—and even embrace—governance structures that provide founders with control because they recognize founders are often best-positioned to develop a company that focuses on innovation, mission alignment, and long-term value creation.
Rethinking Sunset Provisions
The performance-first logic also reframes the ongoing debate over sunset provisions. Critics argue that dual-class structures should be time-limited to avoid entrenchment and to restore shareholder accountability. While this logic is understandable, it risks oversimplification. Time-based sunset provisions assume a linear decline in founder value over time, ignoring the possibility that founder leadership may remain critical for navigating competitive environments, maintaining corporate vision, or preserving cultural identity.
In practice, many companies have extended their sunset terms, citing continued strategic needs. Investors, again, appear more interested in whether the company can execute effectively than whether the founder’s voting rights expire after seven years. In our view, the market’s acceptance of sunset extensions reflects a rational, performance-based calculus rather than a failure of accountability.
Beyond Formalism: Toward a Functional Governance Paradigm
We argue for a shift in how dual-class structures are evaluated. The prevailing academic and regulatory focus on voting equality and governance ‘best practices’ often obscures the more meaningful drivers of value creation. Governance, we believe, is a means to an end—not an end in itself. What matters is whether a company’s structure supports its long-term mission, aligns with its stakeholders, and enables effective strategic execution.
This is not to suggest that all dual-class structures are optimal. Nor do we argue that governance questions are irrelevant. Rather, we contend that governance assessments must be grounded in empirical reality and focused on outcomes rather than ‘one-size fits all’ theory. In many cases, dual-class arrangements have empowered founders to pursue bold strategies that would have been vulnerable to short-term attacks and pressures in a traditional governance model. Ultimately, these structures can and did promote innovation, facilitate long-term investment, and shield mission-driven leadership from reactive shareholder activism.
Conclusion: Let Performance Lead
In an era where governance debates are often dominated by formalist concerns and one-size-fits-all solutions, we believe it is time to refocus on what the market already understands: performance leads governance. Dual-class structures should not be reflexively condemned or uniformly mandated to sunset. Rather, they should be evaluated in light of whether they enable the company to achieve its strategic goals and deliver value over time.
The data show that investors are not ideological. They reward results, not just governance checklists. If dual-class structures help companies outperform, innovate, and remain mission-driven, then they deserve a place in the modern corporate governance toolkit. As such, regulatory and scholarly efforts should shift from enforcing structural orthodoxy to fostering governance frameworks that support long-term performance and entrepreneurial vision.
Ultimately, governance is not about form—it is about function. And function, in the end, is measured in performance.
David J. Berger is a Partner at Wilson Sonsini Goodrich & Rosati, President of the American College of Governance Counsel, a Fellow at the Rock Center for Corporate Governance at Stanford University, and a Senior Fellow at the NYU Institute for Corporate Governance & Finance. He can be reached at dberger@wsgr.com.
Pierluigi Matera is a Professor of Comparative Law at LCU in Rome, a Professor of Corporate and Business Law at LUISS, and a Lecturer in Corporations at Boston University School of Law. He is also a co-founder and Managing Partner at Libra Legal Partners in Rome, Italy. He can be reached at matera@bu.edu.
The full paper on which this post is based is forthcoming in the Journal of Corporation Law Digital 2025 and is available here.
Share
YOU MAY ALSO BE INTERESTED IN
With the support of
