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Zuckerberg’s Despotic
Control Has Facebook
Under the Microscope Yet Again



As Facebook, the biggest social-networking company to date prepares to go public, the company is still under scrutiny regarding its corporate governance structure. The reason for this is that the set up of said structure is designed to give founder and CEO Mark Zuckerberg unwavering control over the business end. The latest blast came on Monday, from ISS (Institutional Shareholder Services), a proxy firm that does advisory work for large shareholders of public companies. In a harsh report, the ISS called Facebook’s governance structure “despotic,” and that it abates “shareholder rights and board accountability.” The critique from ISS follows similar affairs raised by the giant California pension fund; California State Teachers’ Retirement System, which has a portfolio of $145 billion and owns a portion of Facebook’s shares through its private equity managers.

To be precise, ISS points out Facebook’s duel stock structure, this executes the creation of A and B shares. The B shares, wielding 10 times the voting power topples the balance of the structure and the ISS calls this arrangement unfair to the ordinary shareholders who will nab up the company’s stock as soon as it goes public. Since Zuckerberg founded Facebook eight years ago in a Harvard dorm room, he has systematically cemented his full control over the company.

Owing to his holding of B shares, Zuckerberg maintains dominion over 57% of the company’s voting power. As soon as the company is officially public, this structure will give Zuckerberg the right to single-handedly come to solutions on issues that require a shareholder vote, including merger decisions and board elections. Zuckerberg, at 27 years young, even holds the right to select his own successor. 

“This is a governance profile with a defense against everything except vanity,” I.S.S. noted dryly. Facebook’s governance structure has already elicited concern from leading independent corporate governance experts including Charles Elson, director of John L. Weinberg Center for Corporate Governance at the University of Delaware “I find it very troubling,” Elson said last week.  “The whole tone to me was contrary to where governance has been moving, and the lessons that we have learned.”

In creating a dual-class shareholder structure, Facebook is following in the path of other newly public tech companies, including LinkedIn, Groupon, and Zynga. This structure, I.S.S. writes, stands “in striking contrast to the long-standing desires of the institutional shareholders whose cash Facebook hopes to take.” Although individual shareholders will no doubt flock to Facebook’s IPO, the biggest shareholders of the company will most likely be large institutional investors like pension funds and mutual funds.

But despite the “autocratic” nature of Zuckerberg’s control over Facebook, I.S.S. predicts that investor appetite to own a piece of the largest Internet IPO in history will result in a successful offering. “Even a strong distaste among institutional investors for the company’s archaic governance practices is unlikely to diminish the economic success of the IPO,” as it was written in the ISS report. Facebook has plans to raise US $5 billion in an Initial Public Offering that could set the value of the company as high as $100 billion.

 

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