I.S.S. Adds to Criticism of Facebook’s Governance
By MICHAEL J. DE LA MERCED
DealBook
New York Times
February 13, 2012, 4:29 pm
Not everyone likes Facebook’s proposed corporate governance plan. Add Institutional Shareholder Services to that list.
The influential proxy adviser took aim at Facebook’s dual-class stock structure in a research note published on Monday, deriding it as an unfair system to regular shareholders — one that could be extremely painful to unwind down the road.
By creating multiple classes of stock — in Facebook’s case, A and B shares, with the latter carrying 10 times more voting power — the social-networking titan is following the path set by LinkedIn, Groupon and Zynga. As the Deal Professor and others have noted, however, a number of unusual arrangements give the company’s chief executive and co-founder, Mark Zuckerberg, control of about 57.1 percent of the company’s voting power.
That is a topic that has drawn censure from a number of corporate-governance watchers, including the California State Teachers’ Retirement System, a large pension fund .
It’s little surprise that I.S.S., long a critic of dual-class shares, is against Facebook’s proposed system. Let’s count the ways the shareholder adviser denigrates the framework in Monday’s note:
- “This is a governance profile with a defense against everything against hubris.”
- I.S.S. later refers to “governance structures which diminish shareholder rights and board accountability.”
- I.S.S. also calls it “an autocratic model of governance.”
In what seems like the equivalent to I.S.S. of adding insult to injury, Facebook also plans to adopt a staggered board, one where only some board members are up for election every years, and a provision that prevents shareholders from complaining about their lesser voting rights.
But the proxy adviser also notes that, should Facebook want to dismantle its dual-class system, such a move could be difficult. I.S.S. details the issues that Benihana, Telephone & Data Systems and Magna International suffered in even partially streamlining their shares. Among the consequences was internecine warfare between different shareholder classes, which led to at least short-term pain for investors.
Ultimately, however, Facebook shareholders face what I.S.S. calls a “Hobson’s choice” at the moment. They can become second-class shareholders with relatively few protections or miss out on one of the most eagerly awaited I.P.O.’s of the decade.
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