Facebook Governance Already a Concern For Giant CA Pension Fund

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REUTERS/Robert Galbraith

Well, that was fast. Less than one week after Facebook announced plans to go public, one powerful investing group — the giant California state teachers pension fund — is already voicing concern about the company’s management structure, which founder Mark Zuckerberg dominates. The California State Teachers’ Retirement System, which has a $145 billion portfolio and owns Facebook shares through its private equity managers, plans to send Facebook a letter outlining its concerns, according to Bloomberg.

Since Facebook’s early days, Zuckerberg has methodically consolidated iron-clad control over the company. The 27-year-old founder owns about 28% of the company outright, but through proxy arrangements with two major investors, DST Global and Accel Partners, he will control a majority of the company’s voting shares. That will allow him to single-handedly decide any matters that go before a shareholder vote, including the election of board directors and merger decisions. Zuckerberg even has the right to appoint his own successor.

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That structure has already prompted worry from 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 told Reuters. “The whole tone to me was contrary to where governance has been moving, and the lessons that we have learned.”

The California teachers pension fund, known as CalSTRS, is one of the most powerful players in the U.S. financial markets. It’s one of the largest pensions funds in the world — and the largest U.S. teachers retirement system — and manages money for over 850,000 members. It also has a long history of shareholder activism and has been a prominent voice for improving U.S. corporate governance. CalSTRS own Facebook shares through its private equity managers and plans to purchase more once Facebook goes public, according to Janice Hester-Amey, a portfolio manager in CalSTRS Corporate Governance unit.

“No matter how brilliant you are, when you come to the public market — not that we want to ever tell Zuckerberg or anyone like him how to run his company — there should be some protection especially for long-term, patient money like CalSTRS,” Hester-Amey told Reuters.

Zuckerberg’s effort to consolidate control over Facebook was quite understandable. But now that Facebook intends to sell shares to the investing public, he can expect growing scrutiny over the company’s management structure. CalSTRS’ expression of concern won’t be the last.

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