Concerned Facebook shareholders want the company to give them an “equal voice”. The social media platform became public in 2012. However, thanks to a controversial company structure, Mark Zuckerberg kept all power over the corporation, even if he is no longer the main owner.
James McRitchie and Myra K. Young from California, who own 100 Facebook shares, publicly asked the company to change its stock structure last March. “Our company takes our public shareholder money but does not let us have an equal voice in our company’s management,” wrote McRitchie and Young in the last proxy of the company.
The shareholders point out the company dual-class structure as the root of the problem. There are two kinds of Facebook shares: the Class A gives the owner one vote per share and the Class B gives ten votes per share.
The vast majority of Class B common stock is in the CEO’s wallet, Mark Zuckerberg. Therefore, it does not matter if the company is more your property than his, because he will always have more voting power than you.
For Gregory Nazaire, finance lecturer at Dalhousie University, for Facebook to have two types of shares is not surprising. “We see this structure for companies where the CEO or the founder wants to have some latitude with regards to innovation.” By keeping all the voting power in his hand, Zuckerberg can lead Facebook in whenever direction he wants, without being pressured by the shareholders votes, explains Nazaire.
However, the shareholders are not comfortable with the situation: they want more control over their investment. “Without a voice, shareholders cannot hold management accountable,” says MicRitchie and Young in Facebook’s financial documents.
In its answer to McRitchie and Young, the Facebook Board of Directors affirmed that Zuckerberg is the best person to lead the company. The Board is urging the other shareholders to vote against the proposition (even if they don’t have enough vote power to change anything).
Zuckerberg doesn’t have to worry for the moment. With over 60% of the vote power, nobody can oppose him. But at what cost?
A risky game
Between 2004 and 2012, Facebook was a private company. Therefore, Zuckerberg was able to take any decision he wanted and he was not accountable to anyone for it.
Then, the company turned public on March 2012. Its Initial Public Offering (IPO) raised $6.8 billion from the public market. Facebook became the property of over 4,000 shareholders on the planet and Mark Zuckerberg, as CEO, became accountable to them.
As Gregory Nazaire says, Facebook is playing a risky game. Since the shareholders’ votes don’t count, they can’t involve themselves into the company management and probably feel less attached to the company. The finance lecturer at Dalhousie says that it could have a big impact on the price volatility of the shares.
“If the shareholders don’t feel, don’t know or don’t understand what Zuckerberg is doing, it is really easy for them to dump the stock and drop the price,” explains Gregory Nazaire. “Investors don’t have the vote, but they still have a level of control: they can control Facebook through the purse.”
Facebook is aware that the almighty position of Zuckerberg could be prejudicial. The 2013 annual report indicates that Zuckerberg’s “concentrated control could […] discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock […] and might harm the trading price of our Class A common stock.”
A study by the Investor Responsibility Research Center Institute, conducted in 2012, compared corporations with two or more classes of shares with corporations with just one type of share. Their results show that companies like Facebook are more profitable for shareholders over a one-year period. However, after three years, it’s the single class companies that bring more money for the shareholders, with higher share price and higher dividends.
Nevertheless, the Facebook Board of Directors still believes that a dual-class structure will help for the long-term success of the company, as long as Mark Zuckerberg will be the main voting owner and the CEO.
Controlled companies: a new trend
The multi-class companies were forbidden on the public markets for a large part of the 21st century, before being allowed in the 80’s and 90’s. Since then, their number increased. Google, LinkedIn, Zynga and Groupon are all public, but tightly controlled companies. Between 2010 and 2012, 20 new companies with a multi-share structure conducted an Initial Public Offering.
Like the Facebook shareholders James McRitchie and Myra K. Young, the Council of Institutional Investors would like the rules to change. Jeff Mahoney, General Counsel of the Council, sent letters to the New York Stock Exchange and the NASDAQ Stock Market, asking them to “prohibit companies seeking an initial listing from having two or more classes of common stock with unequal voting rights.”
However, Gregory Nazaire doesn’t think it will change. As long as Facebook increases its value, the shareholders will close their eyes on the fact that they are powerless, he predicts.
Facebook share price started at $38 in 2012 and is now worth around $70. Moreover, at the last quarter, the company net income increased by 23% between the first and second quater of 2014, as did the cash and cash equivalents by 46%. The liabilities stayed under control with only a 6% increase over the same period of time.
“The vast majority of the shareholders will tell you: we need some kind of democratic process,” says Nazaire. However, for the finance expert, too much pressure from the shareholders could inhibit a CEO to take any decisions. He also adds that a CEO without opposition could lead a company in the wrong direction.
So what’s the fine line between the two? For Nazaire, it’s the question finance experts are currently asking themselves to find a more balanced structure that would satisfy both involved investors and strong willing CEOs.