Tags: Zuckerberg | control | Facebook | risk

Zuckerberg Controlling 57% of Facebook Seen as Risk to Investors

Thursday, 02 February 2012 12:32 PM

Mark Zuckerberg’s majority control over Facebook Inc. puts too much power in the hands of one person and may deter potential investors in the company’s initial public offering, corporate-governance experts said.

The chief executive officer has 56.9 percent of voting power, the Menlo Park, California-based company said yesterday in its prospectus to investors. He also has the ability to designate a successor in the event he still controls the company at the time of his death, Facebook said in the filing.

The 27-year-old, who co-founded Facebook in his dorm room eight years ago, has retained authority over strategy -- even after adding business veterans to the board, including venture capitalist Marc Andreessen and Washington Post Co. CEO Donald Graham. Zuckerberg’s control means directors and shareholders will have less sway over the company’s direction, said Charles Elson, a University of Delaware corporate-governance professor.

“The public has no say in the control of the board, which in my view is terribly harmful to any notion of accountability,” Elson said. “It’s very troubling to investors, and it’s a bad bet for them.”

Larry Yu, a spokesman for Facebook, declined to comment.

Zuckerberg owns 28.4 percent of Facebook, the largest single stake in the company, and he extended his voting power by implementing a dual-class stock structure in 2009. That gives him shares with 10 times more voting power than common stock, according to the filing. The CEO also gained voting power through agreements with individual stockholders. He owns an “irrevocable proxy” over those shares, Facebook said.

Money Versus Power

After Facebook’s IPO, shareholders other than Zuckerberg will have “a majority economic position and a minority voting position,” Elson said.

Technology companies such as Google Inc., Groupon Inc. and Zynga Inc. also concentrated voting power in one or more founders before selling shares to the public. Though the practice reins in the power of investors, it can assure them that companies will stay the course set by visionary leaders, said David Eaton, vice president of proxy research at corporate- governance advisory firm Glass, Lewis & Co. in San Francisco.

“It’s been the case in the last 10 to 15 years that technology companies have typically not incorporated as many shareholder rights,” Eaton said. “The founders who are bringing these companies public want to protect their interest.”

Still, the practice can limit shareholders’ ability to influence management in such areas as executive compensation, he said.

Zynga’s CEO

Zynga CEO Mark Pincus created an unprecedented three-tier stock structure last year that granted him shares with 70 times the voting power of public investors. He controls 36.2 percent of the voting power at the San Francisco company, which develops games for social-networking sites.

Some companies with dual-class stock have encountered resistance from investors. In 2010, shareholders of Magna International Inc. voted to eliminate that arrangement at the Canadian auto-parts maker and the power it gave founder Frank Stronach.

Facebook said it meets the requirements of a “controlled company” under rules for publicly held businesses because of Zuckerberg’s majority voting power. The designation lets it skip governance rules that apply to most companies holding an IPO, such as the need for a compensation committee and a board made up mostly of independent directors.

“Zuckerberg controls the vote and, because of that, they don’t have to adhere to the strict rules of public companies,” said David Larcker, professor at Stanford University’s Rock Center for Corporate Governance.

The prospectus also lets Zuckerberg designate his successor “in the event that Mr. Zuckerberg controls our company at the time of his death.” There may be no precedent for a company to include that clause before an IPO, Elson said.

“It may be out there, but I’ve never seen it,” he said. For long-term shareholders, “it means you are stuck.”

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Thursday, 02 February 2012 12:32 PM
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