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Facebook shareholders are wedded to the whims of Mark Zuckerberg

Because of Facebook's two-class stock structure, the social networking giant's founder and CEO can do whatever he wants with the company, no matter what other shareholders may vote.

May 20, 2012|Michael Hiltzik
  • Thanks to a dual-class stock structure, Facebook founder and CEO Mark Zuckerberg will own about 28% of the company but control 57% of all shareholder votes. Above, a woman watches Zuckerberg speaking in a promotional video ahead of the company's IPO.
Thanks to a dual-class stock structure, Facebook founder and CEO Mark Zuckerberg… (Mladen Antonov, AFP/Getty…)

So, against all odds, you managed to get your hands on a few shares of Facebook stock via one of the most hyped initial public offerings of all time and managed to survive its messy first day of trading.

Congratulations. You're now married to Mark Zuckerberg.

The 28-year-old company founder is today one of the most deeply-entrenched chief executives in American business. Thanks to a two-class stock structure, Zuckerberg will own about 28% of Facebook but control 57% of all shareholder votes. To put it simply, he can do whatever he wants with Facebook, and you, the shareholder, don't have a say — not even if you team up with every other outside shareholder in the company. You can't veto a decision or vote down his choice of board members.

Your purchase of Facebook shares was an expression of supreme confidence in Zuckerberg. You better hope he does everything right, because if he doesn't, he'll be harder to get rid of than tuberculosis.

Zuckerberg's impregnable ownership stake, which even allows him to name his posthumous successor, may have had something to do with the company's uninspiring reception by stock investors last week. But it isn't unique in American business, especially in Silicon Valley. Only a few weeks ago, Google announced plans for a new class of shares with no voting rights at all, the better to enhance the control positions of co-founders Larry Page and Sergey Brin and Executive Chairman Eric Schmidt, who already shared roughly two-thirds of all shareholder votes. At Zynga, a game company whose fortunes are inextricably linked to Facebook, founder Mark Pincus holds all the company's Class C shares, which carry 70 votes each. After a recent stock offering he and his insider pals controlled 98.2% of the company's voting power.

At heart, these arrangements are expressions of contempt for the very principle of taking a company public. Facebook didn't have to go public to raise money, of which it had plenty in the bank. It was pushed into doing so by federal law, which mandates public financial disclosures once shares in a company become distributed to a large enough insider group. Zuckerberg was indisputable king of Facebook the private company; so why should anything change for Facebook the public corporation?

"The idea is that the rest of us should be happy to go along," says Charles M. Elson, an expert in corporate governance at the University of Delaware. "You're assuming he's infallible, but if something goes wrong, you're powerless."

It won't do to argue that Zuckerberg's actions still affect only Facebook. As head of a public company, his actions will be scrutinized at a granular level as never before. The reverberations will be seen not only in their direct effect on the company itself, but in how they are regarded by investors in the stock market, whose take will in turn affect how the stock is priced and therefore the value of portfolios, small and large, in which they are held. That's a lot of responsibility for someone who must be considered — even if you accept his fawning treatment by the press — a novice.

It's not as though Facebook has clear sailing ahead. Its user growth rate has already slowed, its weak spot is advertising on the mobile devices through which more than half of its users log in, and major advertisers such as General Motors question whether Facebook ads work at all. These issues would be challenges even for a veteran chief executive with an experienced board looking over his or her shoulder; what about for one who doesn't think he needs to answer to anybody? Facebook's ownership structure "destroys accountability," Elson says, "and accountability makes you a better manager."

It may turn out that Zuckerberg is exactly the visionary genius he's billed as. Some young CEOs are, but how many? All we can say is that whatever the number is, it's a lot smaller than the number of wunderkinds anointed thusly by their public relations flacks and shills in the press.

Indeed, if you're wondering whether Zuckerberg will wield his imperial power with the maturity and circumspection one expects from the CEO of a corporation valued at more than $100 billion, the hints are emerging. In early April, after the IPO was already in train, Zuckerberg privately worked out a deal to acquire a photo-sharing service named Instagram for $1 billion. It was Facebook's largest acquisition ever, it is widely regarded as an overpayment, and the Facebook board learned about it after it was a fait accompli.

Leaving aside why any self-respecting business person would agree to sit on a board that gets treated that way by a CEO, does this bode well for Zuckerberg-style management?

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