One for you, 10 for me. That’s the difference in votes per share between the stock held by Facebook (FB.) insiders and the rest. Founder and CEO Mark Zuckerberg alone holds 58 per cent of management ‘B’ shares.
On 26 May at the company’s annual general meeting, Proposal 4 argued for one share, one vote and Proposal 5 for splitting the roles of Chair and CEO. Facebook urged against both motions and both failed.
The results were inevitable but regulatory filings with the Securities and Exchanges Commission (SEC) show support for Proposal 4 was equivalent to nearly 80 per cent of the non-management voting entitlement. For Proposal 5 the figure was 46 per cent. Clearly shareholders want more of a say in the running of their company and many have concerns about governance.
Commonly the argument in favour of multi-tier share classes is they enable talented founders to keep hold of the reins and drive innovation. One of the recommendations in the Hill Review into reforming UK capital markets was to make it easier to list with this structure and make London more attractive to tech companies.
Trying to compete with founder-friendly US rules may drum up business for the City but whether that’s a good thing for corporate governance is another matter. Casting an eye back across the Atlantic to Facebook’s controversies, the drawbacks of the American way are all too apparent.
Of all the AGM items, the most moving was abuse victim Sarah Cooper making a brave appearance to speak in support of Proposal 6, a motion which wants Facebook to: “[assess] the risk of increased sexual exploitation of children as the Company develops and offers additional privacy tools such as end-to-end encryption.”
The number of votes cast in favour was equivalent to 49 per cent of non-management shares, up from 43 per cent when the same motion was put before the 2020 AGM.
On such an emotive matter, arguably the concerns of shareholders should be taken as wise counsel and affect policy. We can infer that the motion only just failed to win majority backing by ordinary investors. Furthermore, given the significant number of abstentions, serious questions must be asked about the two-tier voting structure.
Zuckerberg, unquestionably a brilliant driving force behind the emergence of social media in the 2000s, doesn't get every call right (such as his digital currency Libra project, which irked authorities). On other matters, now Facebook is a mature company that has to think about regulators and its reputation, the input of shareholders at AGMs is valuable and not just a nuisance.
The issues behind Proposal 6 are one aspect of the dilemma Facebook finds itself with as it seeks to satisfy concerns about privacy and also to extract more commercial value from its audiences. Data is both Facebook’s most valuable commodity and a bone of contention with lawmakers around the world. Juggling how to squeeze more revenue out of audiences with stricter privacy laws has made end-to-end encryption imperative.
Potentially encryption technology facilitates advertisers having private and secure conversations with users who give their consent. This valuable feature could open the door to monetising Whatsapp and is a perfect complement to Instagram’s consumption-inducing interface.
Encrypted conversations are much harder to monitor, which is good for a private chat between friends or a business you are ordering from. The trouble is, it can also be used by predators.
Procrastinating on this issue will invite government scrutiny and ultimately regulation. In the UK the Home Secretary has spoken out urging delay in the role out of end-to-end encryption until satisfactory protections for children are in place.
Although a global business, being domiciled in the US means that Facebook isn’t bound by an equivalent to the UK’s Corporate Governance Code, which makes it a requirement to consider all stakeholders including society at large. It is, however, subject to the scrutiny of institutional investors for whom environmental, social and governance (ESG) matters are now central.
For asset managers charged with stewardship on behalf of investors, the trade-off between having a say and financial performance is more complex than it was in 2012 when Facebook first listed. Now they not only want proof the company can find new ways of delivering growth but also signs it takes its obligations to stakeholders seriously.
Accepting those shareholders must be listened to would be the perfect place to start. If Facebook continues to rebuff demands for fairer representation, then investors may eventually vote with their feet. Any more scandals will hasten decisions to do so.
