ISS to Facebook: Mark Zuckerberg has too much power

ISS to Facebook: Mark Zuckerberg has too much power

Summary: The Institutional Shareholder Services has told Facebook that its co-founder and CEO Mark Zuckerberg has too much power; he has voting control over at least 57.1 percent of Class B shares.

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The Institutional Shareholder Services (ISS), an organization that provides corporate governance services, has complained that Facebook is employing a dual-class stock structure when it goes public sometime in May. Facebook plans to have two types of stock: Class A (worth one vote, and available to those who want to buy the company's stock on the open market) and Class B (worth 10 votes, and only available to select individuals and investors). More specifically, the ISS has criticized the world's largest social network for giving co-founder and CEO Mark Zuckerberg too much control.

As I noted when Facebook filed for its $5 billion initial public offering (IPO) earlier this month: the numbers published by the U.S. Securities and Exchange Commission show Zuckerberg has a 28.4 percent stake in the company. That being said, he also has voting control over at least 57.1 percent of Class B shares through a chain of agreements with other shareholders. Zuckerberg bought voting control shares from multiple parties for $100 apiece.

"Facebook appears to have taken the same outdated dance lessons as many other recent tech sector debutantes," the ISS wrote in its report titled "The Tragedy of the Dual Class Commons," a copy of which was obtained by The Wall Street Journal. The firm calls the dual-class structure "an autocratic model of governance" that makes Facebook "less viable if a competitor whose governance gives owners a voice proportionate to the economics they have at risk."

The ISS has criticized other companies, such as LinkedIn and Zynga, for having dual-class stock structures, but it doesn't have any power to convince them otherwise. Facebook will thus likely ignore the group's disapproval. With more than 50 percent of the power, Zuckerberg can single-handedly make all board decisions, acquisitions, and merger approvals, regardless of what other Facebook shareholders want.

For its part, Facebook has acknowledged that Zuckerberg's voting control is a risk factor. Here's the relevant excerpt from its SEC filing:

Our CEO has control over key decision making as a result of his control of a majority of our voting stock.

As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg, our founder, Chairman, and CEO, will be able to exercise voting rights with respect to an aggregate of shares of common stock, representing a majority of the voting power of our outstanding capital stock following our initial public offering. As a result, Mr. Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in the event that Mr. Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally. For a description of these voting agreements, see “Description of Capital Stock—Voting Agreements.”

Just last week, the California State Teachers' Retirement System (CalSTRS) told Facebook that a board of directors of seven members is unacceptable, not only because it is small but because it only features men. Facebook did not comment on my last article regarding CalSTRS and likely won't comment on this one regarding ISS, but I have contacted the social networking giant and will update you if I hear back.

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Topics: Banking, Legal, Social Enterprise

Emil Protalinski

About Emil Protalinski

Emil is a freelance journalist writing for CNET and ZDNet. Over the years,
he has covered the tech industry for multiple publications, including Ars
Technica, Neowin, and TechSpot.

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Talkback

29 comments
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  • It's not too much power

    So what's the problem? Why shouldn't the genius who single-handedly changed the web and social interaction as we know it be able to control HIS company? It's worked quite well so far.
    happyhappe
    • And how much money will you be donating to the Zuck....

      @happyhappe
      ....to do as he pleases with??? Good luck.
      Userama
      • RE: ISS to Facebook: Mark Zuckerberg has too much power

        @Userama ...with his company. Dont buy the stock if you dont like it. or sell your Highly profitable shares 6 months after the IPO.
        Bodazapha
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @happyhappe
      Please, please, please let this comment be sarcasm.
      lippidp
      • RE: ISS to Facebook: Mark Zuckerberg has too much power

        @lippidp +1
        pupkin_z
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @happyhappe He can structure his company any way he wants, but I wouldn't invest in him. The same factors that make you successful starting a company are usually traits that act as hindrances to keeping it that way. Even jobs had his ego hurt Apple more than once in their history. I would argue that had he the control Mark Z. has with Facebook we'd all be using the LISA and the Newton right now instead of iPads and Macs.
      Socratesfoot
      • RE: ISS to Facebook: Mark Zuckerberg has too much power

        @Socratesfoot LISA was taken away from Jobs, Newton was Sculley's baby. When Jobs came back he took a failing company and brought it on top. Yes, a founder can bring his company to the top.
        themarty
  • RE: ISS to Facebook: Mark Zuckerberg has too much power

    Even Apple had to shitcan Jobs before they got good again.
    trust2112@...
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @trust2112@... Apple fired Jobs that was like the doom to Apple..
      pepe-el-Toro
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @trust2112@... Apple got good again when Jobs got control of Apple again.
      themarty
  • RE: ISS to Facebook: Mark Zuckerberg has too much power

    I trust Mark Zucherberg to know what's best for his company.
    themarty
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @themarty And with the correct spelling of his name appearing in the title, you still managed to spell his name wrong.
      Snooki_smoosh_smoosh
  • International Space Station

    Why did the International Space Station call Zucker?
    goingbust
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @goingbust NASA needs money.
      themarty
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @goingbust LOL, yeah that's what I thought at fist too. I definitely think "International Space Station" whenever I see ISS.
      CobraA1
  • Why not trust Zuckerberg? Because . . .

    He screwed everybody who had a significant part of the inception or development of Facebook, including his best friend -- indeed, the company was founded on work he was supposed to be doing for hire -- and his chutzpah is such that he'll screw his entire body of stockholders on a whim or any hint that his Absolute Authority is being challenged. He is, essentially, unstable and power mad. "Power corrupts. Absolute power corrupts absolutely."
    NeverLift
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @NeverLift

      boo hooo hooo cry me a river. I don't care much for using Facebook myself, but Zuckerberg is no doubt smart at what he does. He took advantage of opportunities (and yes people too) given to him and made and had a hand in creating something huge. Good for him. Everyone else can stop wasting their time crying over spilled milk. What's done is done.
      smulji
  • RE: ISS to Facebook: Mark Zuckerberg has too much power

    That's like saying that Steve Jobs had too much power at Apple for them to be successful. Hello, these academic theories don't mean anything - the proof that Facebook's management is fine is that they're doing extremely well for themselves. If the market didn't think Facebook was fine, they wouldn't invest. If Institutional Shareholder Services doesn't like Facebook's management, nobody is forcing them to invest. A lot of people really like to dump on Mark Zuckerberg's character, and while he may or may not be of questionable ethics, he really has done a fabulous job running Facebook. The upcoming Facebook IPO is going to set their value at over ONE HUNDRED BILLION DOLLARS in my opinion. For a company that's relatively young, that's incredible. They've gained a lot of goodwill and favor from the business community: look at how many big brands promote their Facebook URLs on TV ads, look at how many companies are listed at http://www.facebookfansreviews.com that do nothing other than promote business pages. And they're nearing a billion active users as well. Zuckerberg may not be a saint, but he's a heck of a businessman and deserves a lot of credit for Facebook's continued success. Pure nonsensical grandstanding from ISS.
    RedE
    • RE: ISS to Facebook: Mark Zuckerberg has too much power

      @RedE I agree that business is showing great support by using FB to promote just about everything - but that is sheer eyeballs, not to do with good or bad business practice at Facebook. The ISS position is not nonsensical - it is entirely logical and a fair warning to those investing - as a shareholder you will have no control, not individually or collectively as you do not hold a majority voting interest even as a whole. That is a very sound warning - albeit Facebook were decent enough to declare it in their own filing - so it's not exactly news.

      So as an investor you have to decide - are you OK with that level of control. (none). I think a very large number of Yahoo shareholders would have liked to see it purchased by MS and realized the offered value - if such a situation arises for Facebook (with a controlling interest who likely 'does not need the money') you are very unlikely to see that realized value either - unless it suits his whim at the time - seems very unlikely from the 'world domination' messages which come from Zuckerberg.
      nigebj
  • RE: ISS to Facebook: Mark Zuckerberg has too much power

    As with Netflix all it takes is one bad decision to have catastrophic results. Spreading the power out helps to prevent one person with a big ego or who's not in the right frame of mind making a decision that will ruin a company.
    Zipbullet2