Facebook and Google Embrace Innovation, Not Corporate Governance

The tech giants’ founders use multiple share classes to keep tight control of their businesses, but investors don’t seem to mind.


Mark Zuckerberg believes that if investors are happy with Facebook’s fantastic growth, they should grant him carte blanche to run the company he co-founded for as long as he wishes. So in April, Zuckerberg announced the creation of a new class of stock, known as C shares, that will ensure his control over Facebook even if he goes ahead with plans to sell most of his holdings to support his favorite philanthropic causes.

Zuckerberg is by no means breaking new paths in corporate governance. Over the past decade a number of high-flying high-tech companies have created multiple share classes. Google founders Sergey Brin and Larry Page, along with executive chairman Eric Schmidt, adopted a dual-class share structure in 2004. They added a third class of shares in 2012, similar to Facebook’s C shares, to maintain their voting power in case they sell off shares for their own charitable aims.

“There’s a mantra in Silicon Valley that founders should retain control,” says Brian Wieser, senior analyst at Pivotal Research Group, an equity research firm based in New York. “They can always point to all the bad things that happen when they have to — gasp! — respect shareholder wishes.”

Others have little sympathy for whining investors. “Google and Facebook founders were very up-front in explaining to shareholders what they intended to do,” says Lise Buyer, founder of Class V Group, an IPO advisory firm based in Portola Valley, California, and Bronxville, New York. “In effect, they said: ‘If you don’t want to own the stock, you don’t have to. On the other hand, if you think we have done a good job managing the business thus far, you might agree that we are the best people to continue running this company going forward.’”

Few if any investors have cashed in their soaring Facebook and Google stock on the grounds that their rights as shareholders are being ignored. But a handful have made their displeasure known. T. Rowe Price Group, for example, votes against board members who are on the governance committees of companies that have dual- or triple-share structures in place and no plans to phase them out. The gesture may only have symbolic impact, but it makes clear that the firm does not endorse these arrangements.

Investors can always point to a company like Amazon.com that hasn’t created C stock and still has been able to focus on long-term projects without trying to appease Wall Street on a quarterly basis.

In any case, a founder with absolute power is no guarantee that a company will maintain a successful course. Witness, for example, the tribulations of Viacom, the once-dynamic entertainment conglomerate that includes CBS, cable companies and movie theaters. Its major shareholder, Sumner Redstone, 93 and ailing, created a trust that controls the company without much transparency and at the expense of minority shareholders. After a bitter, multisided legal struggle, Redstone and his daughter, Shari, in August wrested control over Viacom from senior executives. Meanwhile, the conglomerate’s operations have struggled and shares have plummeted.

Of course, it’s difficult to imagine Zuckerberg allowing a similar mess to envelop Facebook. And his altruism seems unquestionable: Last December he and his wife, Priscilla Chan, created a limited liability corporation that would receive 99 percent of their Facebook shares during their lifetimes for causes such as “helping cure all diseases by the end of the century,” as Zuckerberg posted on a blog.

With the C stock Facebook will issue some 5.7 billion new shares — the equivalent of a 3-for-1 split — that have no voting rights. This will leave Zuckerberg with 60 percent voting power even if he and his wife dispose of the vast majority of their Facebook holdings. Zuckerberg has promised that these disposals will be made at a measured pace so as not to weaken Facebook’s share performance.

Facebook’s stock soared 25 percent this year through mid-September, leaving the company with a $373 billion market cap and a chorus of superlatives from Wall Street. “Investors only seem to care about governance issues when things go wrong,” notes Wieser.

See also, “Facebook and Google Wage War on Advertising.”