It’s been a rough year for Facebook, which has been dogged by scandal and controversy, and the past week of events at the Menlo Park, California-based company has been among its worst yet.
A blockbuster New York Times story published last week detailing Facebook’s behind-the-scenes efforts to downplay and deny a string of recent controversies, including the Cambridge Analytica data breach and Russian disinformation, placed fresh scrutiny on the 34-year-old tech executive and others in power at Facebook, including chief operating officer Sheryl Sandberg.
The Wall Street Journal reported on Monday that Zuckerberg earlier this year told top executives at Facebook that the company was at war, and his approach has caused turmoil within the company. Morale has declined, and multiple key figures within Facebook have departed.
On a call with reporters last week in the wake of the Times story, Zuckerberg was asked whether anyone at Facebook would lose their jobs over what the Times account says happened — or whether he’ll give up some of the control he holds. Zuckerberg is the founder, CEO, and chair of Facebook. Would he be willing to give up, say, his position as board chair?
Zuckerberg’s answer, as it has been for years, was no. “For the board composition, I don’t think that that specific proposal is the right way to go,” he said.
And the thing is, no one can make him.
Even before the latest scandals, there have been questions about whether too much influence within Facebook has been placed with Zuckerberg and, among some investors, pushes for him to renounce his position as chair of the board. But because of the way Facebook’s shareholder structure is set up — and the number of shares Zuckerberg holds — there’s no way for anyone to force him out.
Facebook may be a publicly traded company, but Zuckerberg pretty much makes the rules.
Zuckerberg gets most of Facebook’s shareholder votes
Shareholders in stocks of publicly traded companies have a certain set of rights related to that investment, including the right to vote on certain corporate matters, such as members of the board of directors, proposed mergers and acquisitions, or executive pay packages.
In most cases, one share of a stock equals one vote, but not always — including at Facebook.
Facebook has what’s called a “dual class” structure of “Class A” shares and “Class B” shares. The Class A shares are what everyday investors on the regular stock market have access to, and they’re one vote per share. The Class B shares, however, are controlled by Zuckerberg and just a small group of insiders. And every Class B share gets 10 votes.
“Companies like Facebook are basically putting in place a share structure that is a bulwark against management change,” Amy Borrus, the deputy director of the Council of Institutional Investors (CII), a nonpartisan association focused on corporate governance, told me.
That means that whatever shareholders are voting on — typically at Facebook’s annual meeting, usually in May — Zuckerberg and those closest to him are always going to win out. Bob Pisani at CNBC estimated earlier this year that Zuckerberg and the group of insiders control almost 70 percent of all voting shares in Facebook. Zuckerberg alone controls about 60 percent.
“Anything that requires a shareholder vote, he gets to ultimately decide whether it’s going to get a majority or not,” Jonas Kron, a senior vice president at Trillium Asset Management, an activist shareholder group with about $2.8 billion in assets under management, told me. “That’s clear as day.”
Shareholders have asked for changes to Facebook’s corporate governance before, and they’re doing it now too
Shareholders of publicly traded companies are usually provided a handful of proposals to vote on each year. Some of those proposals are put forth by the company’s management, and others by shareholders. They’re sent to the broader group of shareholders in proxy statements ahead of a company’s annual meeting.
A board then recommends to shareholders how they think they should vote. Sometimes, outside advisory groups, such as Institutional Shareholder Services (ISS), weigh in on how shareholders should vote as well.
Facebook has handled a number of shareholder proposals every year. In 2018, for example, shareholders proposed putting in place a one-vote-per-share setup and implementing reports on fake news controversies and the gender pay gap. Trillium, the asset management group, in 2018 also put forth a proposal for Facebook’s proxy statement, asking that Facebook put together a risk oversight committee to increase oversight mechanisms at the company.
Facebook’s board recommended shareholders vote against all of those proposals. ISS came out in favor of them. They all failed.
The risk oversight committee idea, while it didn’t make it through the shareholder vote, did eventually wind up actually happening at Facebook. It announced a new “Risk & Oversight Committee” in June, soon after the 2018 shareholder meeting took place.
This year, Zuckerberg’s chair position will be up for a shareholder vote as well — even though, as mentioned, it’s going to fail. Trillium has announced a request for Facebook to bring on an independent board chair (as in, not Zuckerberg) that will be on the 2019 proxy statement. In October, the state treasurers from Illinois, Rhode Island, and Pennsylvania and New York City Comptroller Scott Stringer joined in on the proposal. Combined, they hold about $700 million worth of Facebook shares, Kron told me.
“These are very credible, highly serious investors, putting their names and credibility behind the shareholder proposal and encouraging their fellow investors to vote for it,” he said.
That doesn’t mean it will pass. A similar proposal in 2017, which ISS backed, failed.
Zuckerberg’s fate as chair of Facebook “isn’t up to anyone but him,” Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “He has the votes under [the current] structure, and nothing’s going to change.”
This isn’t unique to Facebook
Outsize control given to corporate executives isn’t unique to Facebook. As Pisani at CNBC pointed out, Rupert Murdoch and his family have all the voting power at News Corp. At Google, there are three classes of stock, but the B shares controlled by Larry Page, Sergey Brin, and Eric Schmidt account for some 60 percent of voting shares.
Borrus, from CII, told me that about 10 percent of publicly listed companies have a multi-class share setup, but the proportion is growing among newly public companies, especially in tech. Last year, 19 percent of companies that went public on US exchanges had at least two classes of stock with differential voting rights. In 2005, it was just 1 percent, Borrus said. (Snapchat parent Snap was a highly publicized case because the shares it made public didn’t have any voting rights at all.)
Proponents of such structures, including at Facebook, argue that they help make a company more stable and insulate the board and management from short-term pressure, allowing them to stay focused on long-term success. Facebook has also pointed out that its dual-class structure has been in place since 2009, well before it first went public in 2012, and investors who bought the Class A shares knew that.
But critics of the dual-class setup say that case doesn’t make sense.
ISS said this year that two of its recent studies found that companies with a multi-class structure “generally underperformed” companies without that structure in three-, five-, and 10-year periods. Borrus told me growing academic research suggests that when companies go public, the multi-class structure might at first give them a boost, but that fades to a discount within six to nine years. CII recently petitioned the New York Stock Exchange and Nasdaq to sunset multi-class structures within seven years of an initial public offering.
“Multi-class structures deprive public shareholders of a meaningful voice to affect how a company is run,” Borrus said. “It might sound good with a charismatic founder, but in the long run, it’s bad for investors.”
Zuckerberg might not be the problem at Facebook, but it’s not clear he’s got a solution
All this isn’t to say that Facebook has been a bad investment — it went public at $38 per share, and it’s now trading at about $140. Zuckerberg has steered the company through some tough times, and Sandberg, who joined Facebook in 2008, has been seen as a sort of adult in the room and a steady hand.
Ivan Feinseth, the chief investment officer and director of research at the financial firm Tigress Financial Partners, told me he thinks Zuckerberg has done an “incredible job” at Facebook and mapping out a mission. But he conceded Zuckerberg probably should no longer be board chair.
“I don’t believe he’s the cause of the problems, and I think his management of the company has been very good,” he said. “They do have some near-term problems.”
But given Facebook’s stream of missteps and apologies, essentially since its inception, it’s difficult not to wonder whether bringing about at least some sort of leadership change at Facebook might make a difference. The company’s current management seems not to know how to dig itself out of the hole it’s in, and shareholders can’t try to hold them accountable.
Facebook’s structure “leads to a culture of unaccountability, which ultimately leads to problems,” Elson, the Delaware professor, said.
To be sure, that doesn’t mean there’s absolutely nothing to be done. Facebook’s board could, conceivably, revolt, like Uber’s board did with former CEO Travis Kalanick. The Securities and Exchange Commission forced out Elon Musk as Tesla’s chair, though that was an extreme case.
The Times story describes board member Erskine Bowles, who heads Facebook’s Oversight & Risk Committee, as having “pelted questions” at Zuckerberg and Sandberg over their knowledge of Russian interference, indicating some unrest on the board. But after the Times story broke, Facebook’s board put out a statement supporting Zuckerberg and Sandberg, who also happen to be part of the body anyway.
Ultimately, it seems as though some sort of a management change at Facebook will have to come from Zuckerberg himself. He’s the only one who can make the decision. Kron, from Trillium, said he’s still holding out hope he will.
“For a long time, Facebook and Mark Zuckerberg, they’ve thought of Facebook as being something special and something different, so they didn’t need to play by the same rules as everybody else, and we’re starting to see that’s not true,” he said. “What we’re talking about in these circumstances is Mark Zuckerberg listening to his investors and listening to voices from Wall Street that are encouraging him to do what’s good for him, for the company, for American democracy, and for the company’s users, and build in an independent board chair and then start rebuilding some trust.”