Breakingviews: Peloton gear-change starts with stock, not CEO

Peloton Interactive needed a chief executive switch. More than that, though, the $11 billion fitness firm needs to change its supervoting shares. Even with ex-Spotify executive Barry McCarthy drafted in as a new chief executive, co-founder John Foley’s voting power limits Peloton’s options. Why would he choose to give up that sway? Because it’s in the company’s interests, and his own.

Peloton’s stock rocketed during the pandemic but is now almost back to where it was in March 2020 despite recent sale rumors. In the last six months, the company’s operations used $1 billion more cash than they generated. Revenue for its fiscal year ending in June, the company said on Tuesday, will be roughly 10% below what analysts polled by Refinitiv expected.

The new CEO, who will work alongside Foley in his new role as executive chairman, can stem the cash burn. Closing factories and warehouses and firing workers is painful but Peloton thinks they will save $800 million annually. Investment is being slashed by $150 million. As a former finance chief at Spotify and Netflix, McCarthy should have a keen eye for cutting costs.

Yet Foley holds the reins. He’s now executive chair and has about 40% of all votes, including votes that attach to unexercised options, thanks to supervoting shares. Investment firm Technology Crossover Ventures controls about 38%, potentially adding more complexity to board decisions. Whatever McCarthy cooks up, if Foley really doesn’t like it, it’s unlikely to happen.

Video-game firm Zynga and car-parts maker Magna International show how insider control through supervoting shares can hamper firms. Zynga founder Mark Pincus made way for a new CEO in 2013, reinstalled himself in 2013, and stepped out again in 2016 to little effect. But elimination of supervoting rights in 2018 was followed by a sale of the company at a 64% premium this January. Likewise, Magna’s stock traded at a persistent discount to peers and did little for years before a nearly $1 billion payment to its founder for relinquishing control in 2010. The stock has quadrupled since.

Good management and governance aren’t magic fixes. Consumers may still tire of online exercise. But having a broader shareholder base with equal voting rights minimizes the odds of bad decisions such as buying factories to make Peloton bikes. It also might increase the stock price, which of course benefits Foley too.