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Facebook's Mark Zuckerberg has too much control, major investor says

Facebook Chief Executive and founder Mark Zuckerberg.

By msnbc.com staff and wire

Facebook is about to get a stiff talking to from a heavyweight investor.

The California State Teachers’ Retirement System, or CalSTRS, one of America’s largest pension funds with an investment portfolio valued at around $145 billion, wants to talk to the social-networking site about its corporate governance rules, which it says ignore diversity and give shareholders little say in it how it will be run as a public company.

Facebook filed documents last week for an initial public offering of stock that’s expected to be one of the biggest and most talked about share offerings in recent memory. CalSTRS decided on Friday -- just two days after Facebook filed for its $5 billion IPO -- to contact the company to talk about improving its corporate governance, said Janice Hester-Amey, a portfolio manager in CalSTRS Corporate Governance unit.

“We think they can do a better job when it comes to diversity on their board,” Hester-Amey said.

“I look at a young company going public today, and with all the information out there about the advantages of having a diverse company board versus a homogenous board I can’t help thinking this was a missed opportunity to put some diversity on that board,” she added.

In its IPO registration filing, Facebook states its intention to run itself as a “controlled company,” which exempts it from the corporate governance rules that regulators require of publicly-listed companies.

Controlled companies are defined as companies in which any individual or group of shareholders control more than 50 percent of its shares. In this case, that’s current CEO Mark Zuckerberg, who after the IPO will control a majority stake in the company through stock ownership and voting rights. (The New York Times has done a nice job of explaining Zuckerberg’s share ownership once Facebook becomes a public company, and points out that even Bill Gates had less than 50 percent control over Microsoft at the time of its IPO.)

It’s common for public companies to be owned by their shareholders and controlled by a board of directors who are tasked with looking out for the interests of shareholders. And normal rules for corporations require that a majority of a firm’s board of directors be independent rather than employees of the firm. Committees of independent directors are also required to determine executive compensation and the election of new directors.

But under its controlled company status Facebook is not required to adhere to these rules, and judging by the wording of its IPO registration filing it doesn’t plan to follow them.

“Mr. Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets,” the company states.

“In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors,” the filing continues. “Additionally, 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.”

Hester-Amey points to research that shows a critical mass of board diversity means higher returns and lower risk for investors.

“We would appreciate it if Facebook looked at the diversity issue, and also the absolute control that Mr. Zuckerberg will have,” Hester-Amey said. “We get that a company that’s new to the public markets wants some control while it grows, but as you take in public money you need to protect shareholders and their investments.”

CalSTRS is particularly concerned about the diversity of public company boards because 71 percent of its retirees are women, Hester-Amey said.

The pension fund is invested in Facebook from its funds on the private equity side and is likely to invest in the company’s publicly traded shares, Hester-Amey said, adding that as of June 30 it had an investment in the social-networking company worth around $30 million and has no plans to withdraw its investment if Facebook does not respond to its diversity inquiry.

Should Mark Zuckerberg have so much control over Facebook? Discuss this story here.


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