The Facebook CEO/Chairman debate has come into clear focus at the recent annual shareholders meeting where 68% of outside shareholders supported a proposal to make the role of Chairman an independent position after voicing concern and disapproval over how CEO and Chairman, Mark Zuckerberg, has handled various missteps including a security breach in September that impacted 30 million Facebook accounts.

Additionally, 83% of outside investors voted to replace the current dual-class share structure with a “one share, one vote” system.

Facebook has a dual-class structure in place which means that individual and institutional shareholders have Class A stock where one share equals one vote; Zuckerberg, executive management and directors are Class B voters in which one share equals 10 votes. Zuckerberg himself owns 75% of Facebook’s Class B shares which gives him control of 58% of Facebook’s vote.

As exemplified by the recent Lyft IPO, it is becoming increasingly common for founder led companies to go public under a dual-class share structure that allows the founders to retain control while also having access to the cash provided by public shareholders.

Often the reason sited is that tech company founders/CEO’s want super voting rights to have a longer runway to forward invest in R&D innovation that takes a while to “pay off”, to build a competitive moat without the pressure of having to produce short-term returns for public shareholders.

The drawback of the dual-class share system is that it disproportionately distributes voting power and limits the influence of public shareholders that have large financial stakes in the company while making it virtually impossible to have a voice.

However, in recent years institutional shareholders have become more active and have been increasing their influence via their growing internal corporate governance groups.These internal governance groups have more and more influence as they exercise their power as they vote the proxies. We saw this first hit the scene with huge impact in 2017 when SSGA announced it would cast a “withhold” vote against boards that did not make progress at adding female directors.

I believe that we are seeing the leading edge of the next big flashpoint where institutional governance groups are going to flex their muscles and demand more input on board composition. The Council of Institutional Investors (CII), which represents managers of $25 trillion assets, recently sent a letter to the NYSE demanding that a company must be required to auto-convert their share structure to a one-share one-vote structure no more than 7 years after the IPO date.

I believe that more institutional governance groups will follow suit and begin demanding that companies that have a dual-class share system implement auto-sunset clauses that will go into effect 7 years after the IPO date.

Facebook went public 7 years ago in 2012 and has begun to feel the push-back from investors against the current structure. In addition to the conflict with shareholders, Facebook is also facing regulatory issues on whether they will be defined as a media company and will need to comply with the fact checking standards of media companies. There is also increased scrutiny on the company due to the widely publicized Cambridge Analytica data breach scandal last year which helped prompt federal regulators to look more closely at data privacy laws and whether the social media giant exploits its user’s data.

Given the laser focus that is going to be put on Facebook going forward, their response to “strong-arm” their outside investors and kill any proposal they bring forward is only going to anger shareholders and motivate them to escalate their attempts to drive change.

As a professional board member who has served on over 28 public boards and has seen these patterns before I can say that proxy issues don’t go away, they only get more intense when the institutional shareholders are energized.

Institutional shareholders typically control 70-80% of the publicly traded shares. To ignore these majority owners and strong arm them is not a strategy that will work long term.

In my opinion, the board would be better served to get out in front of these issues and engage with the institutional shareholders and come up with an acceptable compromise, since they already have enough issues to deal with on the regulatory side. Having the shareholder base and the regulatory base negatively activated is too many fronts.

I would recommend they engage with their shareholders and reach an acceptable compromise and then try and negotiate a settlement with the regulators so they can go back to focusing on the “business of the business”.

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