As social-networking giant Facebook prepares to go public, the company continues to attract criticism over its corporate governance structure, which is set up to give founder and CEO Mark Zuckerberg iron-clad control over its business. The latest broadside came Monday from Institutional Shareholder Services, a proxy firm that advises large shareholders of public companies. In a strongly-worded report, I.S.S. called Facebook’s governance structure “autocratic,” and said it diminishes “shareholder rights and board accountability.”
The I.S.S. critique follows similar concerns raised by the giant California pension fund, California State Teachers’ Retirement System, which has a $145 billion portfolio and owns Facebook shares through its private equity managers. In particular, I.S.S. faults Facebook’s duel stock structure, which will create A and B shares, with the B shares wielding 10 times the voting power. I.S.S. calls this arrangement unfair to the ordinary shareholders who will purchase the company’s stock once it goes public.
Since he founded Facebook eight years ago in a Harvard dorm room, Zuckerberg has methodically consolidated his control over the company. Thanks to his ownership of B shares, Zuckerberg controls 57% of the company’s voting power. Once the company goes public, this structure will allow him to single-handedly decide issues that require a shareholder vote, including board elections and merger decisions. The 27-year-old Zuckerberg even has the right to appoint his own successor.
“This is a governance profile with a defense against everything except hubris,” I.S.S. noted dryly.
Facebook’s governance structure has already prompted worry from leading independant 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 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 retrograde governance practices is unlikely to diminish the economic success of the IPO,” I.S.S. wrote in its report.
Facebook is planning to raise $5 billion in an IPO that could value the company at as much as $100 billion.