World Class Faculty & Research / June 23, 2016

Facebook’s ‘Benevolent Dictator’

SMITH BRAIN TRUST — In a move Inc. calls a “Wall Street magic trick,” Facebook’s annual shareholders meeting on Monday yielded passage of a measure to issue 5.7 million shares of a nonvoting C Class stock. Subsequently, co-founder, chairman and CEO Mark Zuckerberg — and the company’s other B Class shareholders (who hold most of the voting power) — can sell off portions of their fortune without diluting their influence over the company.

Like a coronation, Facebook, behind Zuckerberg’s 54 percent voting power, adopted Zuckerberg’s self-conceived (and approved by a special committee within the company) power play to maintain control of the company while he follows through on a pledge to give 99 percent of his shares — the C Class shares — to charity. Zuckerberg already held the majority of shareholder votes despite owning just 28 percent of all outstanding shares. (This, thanks to a previously instituted stock split creating weaker Class A shares.) 

Some stakeholders aren’t happy. After Monday’s meeting, shareholder Julie Goodridge of NorthStar Asset Management vented to CNBC about Zuckerberg and the move: “Look, it's fine if you want to maintain massive control of the company. You should've hung on to 51 percent of the shares. That's just fair.”

The criticism calls into question whether publicly traded companies should be controlled by “insiders” instead of shareholders. A Los Angeles Times columnist, referring to Facebook, wrote: “Super-voting arrangements fundamentally display contempt for the very principle of public share ownership.”

‘Fairness’ vs. Business Sense

“I favor democracy to govern a nation, but Facebook isn’t a country, it’s a company,” says management professor Christine Beckman at the University of Maryland’s Robert H. Smith School of Business. “And a benevolent dictator isn’t necessarily a problem for a corporation.”

A CNBC commentator nonetheless said Facebook is “basically placing all of its trust into the genius of one person, and even a great genius sometimes makes mistakes.”

This factor is “something investors should attend to when purchasing the C Class stock — that they have no pathway to vote for changes,” Beckman counters. “Investors can always sell, of course, and should if they don't like Facebook’s direction.” 

Facebook’s board of directors is believing in Facebook’s direction. A statement on the company’s website reads: “A large part of Facebook’s success has stemmed from the leadership, creative vision and management of Mark Zuckerberg, and that the company’s future success will depend on Mark’s continued leadership.”

The sentiment reflects that of “many of Silicon Valley companies that want to maintain control rather than be subject to the short-term focus of the market and investors who don't know the details of their business,” Beckman says.

Alphabet and Under Armour, Too

Similarly, Alphabet (Google) created a third class of nonvoting shares in 2014 to preserve the voting power of its co-founders and executive chairman, and Under Armour recently adopted a nonvoting class of shares to reinforce founder Kevin Plank’s leadership. “Insider control may cause problems down the road, but losing control of the company causes problems as well,” Beckman says.



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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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