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Why Under Armour CEO’s Power Play Looks Like Bad Governance

Plank gladly accepted investors’ money when he took Under Armour public in 2005, but since then he’s maintained control through an increasingly complex setup of multiple stock classes.
By
  • Bloomberg

DELAWARE, United States — Under Armour Inc. has always been about one thing: Kevin Plank. And Plank, it seems, wants to keep it that way.

Over the past 20 years, Plank has transformed Under Armour from a flyspeck maker of workout wear into a legitimate competitor to Nike Inc.

Yet behind this modern success story is a very old- fashioned approach to corporate governance. Over the years Plank, 42, has maintained his grip on his company by thumbing his nose at the very suggestion of shareholder democracy — the notion that all stockholders are created equal.

Plank gladly accepted investors’ money when he took Under Armour public in 2005, but since then he’s maintained control through an increasingly complex setup of multiple stock classes. His B shares have 10 times the voting power of Class A shares — the ones everyday investors can buy. Now, he wants to issue a third class — C shares — which have no voting rights at all. Google Inc. took similar steps to keep founders Larry Page and Sergey Brin firmly in control.

It’s no way to run a public company, corporate governance experts say. The shareholders are the owners, after all. That means they should have a say.

Nitwits

“Anybody who buys nonvoting shares is a nitwit,” says Nell Minow, vice chair of ValueEdge Advisors, which offers institutional shareholders guidance on corporate governance.

Like Minow, Charles Elson, who runs the corporate governance center at the University of Delaware, says multiple stock classes are simply undemocratic. Founders and CEOs get all the control with none of the accountability. That leaves ordinary shareholders at their mercy, with no way to express displeasure other than to sell their holdings.

“Even great CEOs falter, and here you don’t have any accountability structure that makes sense,” says Elson.

In a letter to shareholders, Plank said his multi-class setup has “served us well” so far. Hard to argue with that: Since the 2005 IPO, Under Armour’s stock has soared 2,400 percent. On Tuesday, the shares climbed as much as 1.9 percent to $82.69, leaving them up 20 percent so far this year.

Maintaining this “founder-led” approach will allow the company to continue to focus on driving long-term growth, innovation and shareholder value, the company added in an e- mailed statement.

Given those stock gains, most investors clearly believe Plank can keep delivering.

‘Extremely Comfortable’

“When we are investing in Under Armour, we are really investing in Kevin Plank,” said Michael Baron, a vice president with Baron Capital Inc., which owns 5.5 million shares. “We feel extremely comfortable with him in control. He’s a great executive.”

Passion, determination, vision: Plank has it all, Baron says. The founder’s next challenge, however, will be to turn Under Armour into a truly global brand — and that may not be so easy. So far, Under Armour has succeeded by grabbing market share in the U.S. To maintain sales growth, it has to expand overseas and branch out into global sports like soccer.

Plank has enriched Under Armour diehards, and he’s done pretty well himself. But he’s sold more than $200 million of Under Armour stock since February 2014, potentially jeopardizing his power by weakening his stake. With his new plan, he can sell all the Class C shares he wants without reducing his control.

Shareholders will have some say on Plank’s pitch — but not much. On Aug. 26, they’ll vote on a proposal to change the company’s charter. Plank, with his super shares, wields about 67 percent of the voting power, and he’s already said he backs the new C shares. So for everyone else, the point is moot.

By Matt Townsend, Michelle F. Davis; editors: Nick Turner, David Gillen, Cecile Daurat. 

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