In Battle For Silicon Valley’s Destiny, Shareholders Strike Back

By Thomas Lee
San Francisco Chronicle

WWR Article Summary (tl;dr) Given the prospect of big gains in share price and the star power of tech entrepreneurs, shareholders in both private and public companies have increasingly deferred to company management, but the balance of power has been starting to shift as investors have come to realize that they need to assert some kind of authority over companies.

San Francisco Chronicle

In the typically one-sided scrum between investors and superstar tech executives, shareholders have been showing more backbone of late.

First, there was the investor-led ouster of Uber co-founder Travis Kalanick, whose tenure as CEO was marked by a workplace culture of pervasive misconduct, sexual and otherwise.

Following Snap’s initial public offering, in which the company behind Snapchat sold stock to the public with no voting rights, S&P said it would no longer include companies with such stock structures in its benchmark indexes.

And now Facebook has scrapped a plan that would have allowed CEO Mark Zuckerberg to sell stock to fund his philanthropy without losing voting rights.

Given the prospect of big gains in share price and the star power of tech entrepreneurs, shareholders in both private and public companies have increasingly deferred to company management, a trend most point to as starting with Zuckerberg, who arranged to preserve his control over Facebook in its earliest days.

But the balance of power has been starting to shift as investors have come to realize that they need to assert some kind of authority over the companies.

“Over the last 13 months, investors have been pushing back on gaining control over (a company’s) destiny,” said Rohit Kulkarni, director of research for SharesPost, a San Francisco firm that arranges trades in private company stock.

Make no mistake, we’re talking real money here. Worth about $70 billion on paper, Uber is the most valuable private tech firm in the world, and has investments from major mutual fund companies like Vanguard Group and Fidelity Investments. Snap, which makes the popular photo app, was one of the most hotly anticipated IPOs in recent memory.

Facebook and Google, which has a similar founder-friendly structure, are together worth more than a trillion dollars.

But where Uber and Snap are unprofitable, unproven businesses that still depend on investors for infusions of cash to burn, Facebook does not have any of those problems.

The Menlo Park social media monolith is arguably at the height of its powers: In 2016, the company’s profit more than doubled to $10.2 billion. Over the past year, Facebook stock has jumped 33 percent to Friday’s close of $170.54 per share.

And unlike Snap’s Evan Spiegel, best known for a jet-setting lifestyle and his marriage to supermodel Miranda Kerr, or Kalanick, who once sent employees a memo counseling them on how to have sex with each other at a company party, Zuckerberg has matured into an effective leader.

Through the Chan Zuckerberg Initiative, the organization he started with wife, Dr. Priscilla Chan, he has shown a strong interest in addressing some of the world’s most pressing problems, including health care and education.

It was those very philanthropic ambitions that tripped up Zuckerberg and Facebook’s board of directors.

Last year, the board approved a plan that would allow Zuckerberg to financially support his social causes without relinquishing control over the company.

Facebook sells Class A shares to individuals and mutual funds like Blackrock, Fidelity and Vanguard. But Zuckerberg owns 467.9 million Class B shares, which carry more voting rights.

Under the plan, which the company nixed last week under pressure, Facebook would have issued two shares of Class C stock for every share of Class A and Class B. That meant Zuckerberg would eventually own 935.8 million Class C shares that he could sell to fund his philanthropic efforts, without losing a single vote.

“For 99.99 percent of public companies, what Facebook (had been) proposing would be dead on arrival,” said Adam Epstein, founder of Third Creek Advisors, a Bay Area corporate governance advisory firm. “It’s now one of the ten largest U.S. companies by market value. That success buys you an awful lot of latitude.”

Separating a CEO from the financial risk of owning a stake in the company is never a good idea. A CEO tends to perform better if he or she has some skin in the game. If Zuckerberg, who already controls most of the voting power in Facebook, wants to sell stock, then he should face consequences, including the loss of those voting rights — just like any other investor.

“What happens to Facebook if something happens to Mark Zuckerberg?” said Matt Orsagh, director of capital markets policy at the CFA Institute. “These guys are relatively young. You’re buying a lottery ticket on Mark Zuckerberg.”

And given recent events, allowing Zuckerberg to run Facebook carte blanche was probably not a good idea.

Since Republican Donald Trump won the presidential election last year, Facebook has acknowledged that the social network promoted fake news stories attacking Democratic opponent Hillary Clinton. And the company recently disclosed that it sold political ads to people linked to the Russian government posing as pro-Trump Americans.

Facebook has handed over data about the ads to federal and congressional investigators, and Congress might even call on Zuckerberg to testify.

Fortunately, some investors were seeking to hold Facebook to some level of accountability. Zuckerberg had been scheduled to appear in Delaware Chancery Court on Tuesday in response to a lawsuit filed against the company by Swedish national pension fund Sjunde AP-Fonden and Amalgamated Bank, a trustee for several union investment funds.

The investors, who own nearly 1.9 million shares, were trying to stop the stock plan. In addition to Zuckerberg, the investors planned to put directors, including venture capitalist Marc Andreessen; Susan Desmond-Hellmann, CEO of the Bill & Melinda Gates Foundation; and former White House Chief of Staff Erskine Bowles, on the witness stand.

But now that Facebook has abandoned the stock plan, Zuckerberg avoids having to defend himself in open court.

“It was going to be uncomfortable,” lead plaintiffs attorney Stuart Grant of Grant & Eisenhofer told me. “He was going to have to answer some tough questions.”

Zuckerberg said Friday that Facebook’s stock had become so valuable that he could fund his charities without worrying about giving up control. Think about that: If Facebook stock hadn’t done as well, would that have somehow made the plan more justifiable?

Facebook’s decision to back down is unquestionably a big win for shareholders. Good corporate governance should apply to all companies, regardless of their success.

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