When it goes public, Facebook will be conducting an experiment in corporate dictatorship nearly without precedent for such a large and high-profile company.
All large firms are, of course, run by powerful CEOs. And when the CEO is also a founder of the enterprise, his control tends to be magnified. But formally speaking, companies are owned by their shareholders and controlled by a board of directors that’s at least theoretically supposed to look out for shareholder interests. In practice, this is often difficult. If you look at Exxon Mobil, America’s largest company, you’ll see that no entity owns more than 4.19 percent of the company. What’s more, the owner in question—the Vanguard Group—is an investment management company, as are State Street, Black Rock, Bank of New York Mellon, and FMR—the next-largest shareholders. The five largest shareholders in Apple, our second-largest company, are FMR, Vanguard, State Street, T. Rowe Price, and Black Rock. That’s how big-time American companies generally work. Ownership is dispersed, and the biggest shareholders are investment companies that own large stakes in all big companies and have no particular sectoral expertise. Vanguard isn’t a mastermind of both electronics and oil, it’s just a giant pool of money that owns a chunk of all big American companies.
It is this distributed ownership that gives rise to a classic problem of American corporate governance: Shareholder interests are so diffuse that it’s hard for shareholders to exert influence on boards that are largely controlled by CEOs and their allies.
Facebook plans to take this idea to its extreme conclusion. It will sweep all the subtle elements of this aside and straightforwardly tell you that no many how many Facebook shares you and anyone else sweep up, it’s Mark Zuckerberg’s company.
Zuckerberg will own only about 28 percent of Facebook post-IPO, but the company will be structured so as to have two classes of stock, Class A shares and Class B shares. Class B shares will each carry 10 times the voting weight of Class A shares. Combine Zuckerberg’s Class B shares with proxies he controls, and he has 57 percent of the voting rights over the company. Splits between two classes of shareholders are fairly common, especially with company’s like Slate’s parent, the Washington Post Company, that are associated with a particular family, but for a single individual to have an absolute majority stake in such a large company is very rare. Even Bill Gates controlled less than 50 percent of Microsoft after its IPO.
It gets better. When an owner of Class B shares sells his or her shares to someone else, they transform magically into Class A shares. That means that if any other Class B shareholder liquidates any shares, Zuckerberg’s degree of control goes up. But since Zuckerberg personally controls a majority of the votes, there’s no benefit to owning Class B shares at the moment and nobody but he has any particular incentive to hang onto them. This, in turn, means that once Zuckerberg’s partners have partially cashed out, he’ll be able to sell many of his Class B shares without substantially diluting his personal control over the company.
And Zuckerberg clearly intends to maintain this arrangement for the long haul, as evidenced by Facebook’s unusual proposed governance structure. The normal rules for an American company require that a majority of the members of a firm’s board of directors be “independent,” rather than managers of the firm. They also require the existence of special committees of independent directors to consider executive compensation and the nomination of new directors. But Facebook, as what’s called a “controlled company,” qualifies for exemptions from those rules—exemptions it intends to take advantage of. In particular, Facebook says it won’t have an independent nominating function for its board and states that it reserves the right to eschew independent directors and an independent compensation committee. What’s more, the transmogrification of Class B shares to Class A status has an exemption “for estate planning purposes” and states that “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.”
To make a long story short, absolutely nothing—up to and including death—is going to dislodge Zuckerberg from control of his firm.
As an investment proposition, this is all pretty dicey. It’s easy to mock Zuckerberg’s “it’s not about the money” protestations, but they’re actually worth taking seriously. If post-IPO Facebook perennially underperforms the stock market at large, that will be a disaster for shareholders but will still leave Zuckerberg unimaginably rich. He’s already made large charitable contributions, and it’s totally plausible that at this point in his life there are things he cares more about than maximizing his income—power, glory, autonomy, and the esteem of one’s fellow citizens are all perfectly reasonable life goals.
There’s something gloriously honest and real about Zuckerberg’s new empire. The line between stock market investing and gambling has always been a bit unclear, but Facebook is choosing to stand firmly on the gambling side of the line. To purchase a share in Facebook is to bet that at some future point some future person will want to take it off your hands for more money. You’re not getting even a notional slice of control in the company. There are no limits on the CEO’s ability to channel Facebook’s profits directly into his own pocket rather than yours. There’s not even a cheap-talk promise that he’s going to try to maximize the value of your investment. He created the company, he controls the company, he will always control the company, and he’s graciously allowing you to turn some of your working capital over to him. On some level, this is how investing already works today. Actively managed mutual funds are a bad deal for investors, as are hedge funds and private equity funds. But if you invest in broad indexes as most people think you should, then by definition you’re abandoning any ability to exercise control over the companies you nominally “own.” You may as well just hand your money over to Zuckerberg.