Federalism: Crash Course Government and Politics #4
Congress should ban Facebooks dual-class stock structure
Facebook's scandals have illustrated Zuckerberg's shortcomings
The Times report alone might have led to the ouster of top executives at another company. But it focuses only on a handful of the myriad of missteps Facebook has made under Zuckerberg and his team of late. Other notable fiascos include the leak of millions of users' personal data to Cambridge Analytica, the more recent hacking attack that compromised some 30 million accounts, and the use of its service to incite violence in Myanmar against the Rohingya people and to spread fake news and hate speech.
Christopher Wylie helped expose the leak of Facebook data to Cambridge Analytica. YouTube/The Guardian Taken together, the scandals have shown vividly that while Facebook under Zuckerberg's leadership was hell-bent on growth, it massively underinvested in, or simply gave short shrift to, concerns such as privacy, security, and the ability of malicious actors to hijack its service. He and his team have been scrambling ever since to address such problems. In the process, Facebook's user growth has slowed, its costs have gone up, and its stock price has slumped.
Those things alone would likely have upset investors and had them agitating for a management shakeup. But each new scandal that's arisen has highlighted Zuckerberg's chief shortcoming as a leader. However technically proficient and visionary from a product perspective he may be, he's consistently seemed to be asleep at the switch when major problems were brewing on Facebook's service. Whether because he was unable, unwilling, unavailable, or just unimaginative, he's repeatedly failed to foresee and head off problems before they arose.
Take the Soros smear. Zuckerberg on Thursday said he'd been unaware until he read it in The Times the day before either about the attempt to link Facebook's critics to Soros or that Facebook had hired the public relations firm that led the effort. You'd think the CEO of a company would be well informed about a major PR effort being conducted on his company's behalf, particularly if it was planning to do something so controversial. But apparently not Zuck.
Read this:Heads ought to roll at Facebook over the Soros smear — starting with Zuck's
Zuckerberg's stock means he has all the power
It's no wonder, then, that investors have repeatedly shown they are indeed unhappy with Zuckerberg's leadership. Last year, a majority of independent shareholders of Facebook voted in favor of a proposal that would have required it to replace him as chairman with someone who had no ties to him or the company. A similar proposal is slated to be up for a shareholder vote again next year. Meanwhile, the company has seen numerous shareholder resolutions in recent years that have sought to take away some of Zuckerberg's power and to provide more outside oversight the company.
Like Zuckerberg, Snap CEO Evan Spiegel has shares that give him outsized control over his company. Greg Sandoval/Business Insider Those efforts have all failed for one simple reason: under Facebook's corporate bylaws, Zuckerberg is something like an absolute monarch. He doesn't have to step down or cede any of his power or submit to anyone else's oversight unless he chooses to do so. And so far, he's chosen to maintain his complete grip on power.
Technically, what empowers Zuckerberg is Facebook's stock structure. The company has two classes of shares — Class A, which is mostly held by everyday investors; and Class B, which is mostly held by Zuckerberg. Each Class B share comes with 10 times more votes than each Class A share. What that means is that even though Zuckerberg owns or controls about 15% of Facebook's total outstanding shares, he gets about 60% of its votes.
That means that just by himself he can vote down any shareholder proposal, nominate anyone he wants to Facebook's board of directors, and pretty much run the company as he sees fit.
Zuckerberg is one of a growing number of executives — many of them in the tech sector — who are insulated from investors and the public by their companies' multi-class stock structures or by outsized voting rights. Others in that group are Snap CEO Evan Spiegel and Spotify CEO Daniel Ek.
Investors are unhappy with dual-class structures
Many investors are getting fed up with such arrangements and for good reasons. Not only do they get little to no control over the companies they own, but research indicates that shares of companies with such stock structures underperform their peers over the long run.
Institutional investors have started to pressure individual companies such as Facebook to eliminate or agree to sunset their dual-class stock structures. They've also started to press exchanges and index funds to bar companies with such stock arrangements.
Natasha Lamb, managing partner at Arjuna Capital, an activist investment firm that has challenged Zuckerberg's power at Facebook, with little success. Natasha Lamb They've had some success. A growing portion of newly public companies that have dual-class structures have sunset provisions that will end them over a period of some years. S&P Dow Jones Indices announced that going forward it will not include any additional companies in the S&P 500 or related indices that have dual-class stock structures. And FTSE Russell announced that to be listed on its indices, companies must have shares worth at least 5% of the companies' voting rights held by outsiders or trading freely.
But none of these developments address the problem at Facebook or other companies that have refused to end or sunset their dual-class stock structures. King Zuck has simply refused to give up power, regardless of the pressure that outsider investors have tried to place on him.
Meanwhile, the S&P Dow Jones grandfathered in companies with dual-stock structures that are already included in its indices. And should the exchanges make a move to bar such companies, they too will likely give a pass to companies that are already listed.
It's time for Congress to step in
Thirty years ago, as the number of companies with dual-class structures started to tick up, the Securities and Exchange Commission tried to force the stock exchanges to bar the practice among their listed companies. Unfortunately an appeals court struck down the rule less than two years after the SEC approved it, clearing the way for Facebook, Google, and other companies to go public with dual-class structures. The appeals court's reasoning was that Congress hadn't explicitly given the SEC the authority to force the exchanges to mandate companies have particular stock structures.
It's long past time for Congress to correct that oversight. It ought to either ban dual-class stock structures among public companies outright, or make clear that the SEC can do so itself.
Doing so wouldn't just help shareholders get a handle on Facebook. It would help make the company — and its tech peers that similarly insulate their insiders — more accountable to the public at large.
For the good of society, that accountability is long overdue.
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