The Immutable Face of Facebook

By Bartlett Naylor and Cheyenne Hunt-Majer

Normally, when a company’s stock dives 25 percent in one morning, as Facebook’s did February 3, 2022, investors may question the suitability of the CEO to remain at the helm. A 25 percent collapse is especially notable for a company with Facebook’s enormous market capitalization, losing more than $200 billion. Big ships aren’t supposed to turn that abruptly.  After all, all but the fifty largest companies are worth less than $200 billion on the stock market.

Calls for resignation would certainly be expected if you add in the fact that under CEO Mark Zuckerberg, Facebook, since renamed Meta Platforms Inc, has repeatedly run afoul of the law. The FTC fined Facebook $5 billion for privacy breaches when it forwarded the data of 87 million users to Cambridge Analytica, which was then used to influence U.S. politics. Whistleblower Frances Haugen released thousands of internal documents showing, despite Facebook’s claims otherwise, that it has promoted hate speech, fake news, anorexia, election manipulation, child exploitation, violence, white supremacy, vaccine misinformation, and much more.

Facebook faces litigation on numerous fronts. It is being sued by the FTC for abuse of their monopolistic power through a pattern of acquisitions which the agency has described as a “buy-or-bury” strategy. In the U.K., it faces a $2.3 billion  class action lawsuit for allegedly exploiting the data of over 44 million users. The company is also defending against a $150 billion lawsuit claiming that Facebook’s actions (and lack thereof) in Myanmar incited violence in a way that “amounted to a substantial cause, and eventual perpetuation of, the Rohingya genocide.” Documents released by the whistleblower clearly corroborate this claim and the company has even publicly admitted its role in the violence.

Usually, any CEO responsible for massive misconduct would face accountability from its investors, and the prospect of termination. Wells Fargo went through two CEOs after federal and state officials uncovered widespread fraud. Heads also rolled during the financial crisis, which stemmed from massive fraud, including the long-serving CEO of Bank of America. A record number of CEOs left their positions in 2019, many under a cloud. In 2018, 39 of 89 CEOs left because of “to unethical behavior stemming from allegations of sexual misconduct or ethical lapses connected to things like fraud, bribery and insider trading,” according to one study.

And yet the tenure of Zuckerberg doesn’t even seem to be up for debate.

That’s because Zuckerberg controls the company through what’s known as dual-class stock. Most companies issue a single class of common stock. This gives each shareholder equal voting rights and ensures that the board of directors are accountable to the shareholders. Meta has what is known as a dual-class share structure with both Class A and Class B shares. Shareholders enjoy one vote for each Class A share. Holders of Class B stock get 10 votes for each Class B share. Zuckerberg holds 81.7 percent of the Class B stock, and therein controls 52.9 percent of all votes. Of total shares, Zuckerberg only holds about 13 percent.

In a well governed company, a board chair is primarily responsible for overseeing the CEO. At Facebook, CEO Zuckerberg is also the board chair. Facebook shareholders voted by a 68 percent plurality to strip Zuckerberg of his role as chair. But Zuckerberg’s super-votes nixed that true majority. In a well governed company, the entire board oversees the CEO. But again, Zuckerberg controls the shares that elect the board.

And yes, independent shareholders attempted to terminate the dual-class system, voting by a margin of 83 percent in 2019.  But the effort also failed because of the dual-class.

No serious, independent corporate governance experts support dual-class shares. The Council of Institutional Investors (CII), composed of some of the largest institutional investors, has long championed an end to dual-class. “Companies like Facebook are basically putting in place a share structure that is a bulwark against management change,” said one CII official.

There might be a case for a dual-class for smaller companies attempting to marshal a thin capital base to develop products that may take years to generate profits. Perhaps they should be shielded from quarterly shareholder pressure. Then again, once a company goes public and invites the average person to risk their savings, that’s the time to demonstrate a product is more than just a promising idea. Relatives, friends, or venture capitalists serve to fund promising but not yet unprofitable ideas.

With a mega-company such as Facebook, there is no justification or support for a dual-class. Look at the shareholder votes at Facebook on this issue.

As a matter of public policy, it is also dangerous to strip away one of the key tools of discipline for a mega-company. Facebook’s impact on society is immense. Washington regulators can and do bring enforcement actions for misconduct. But shareholders also serve on the front line of discipline.

As the Council of Institutional Investors has noted, dual-class structures are “disadvantageous … to the U.S. economy.”

Washington should end the dual-class structure, especially for large companies guilty of misconduct. The SEC can issue a rulemaking. Congress can enact a law.

The nation, and given Facebook’s global reach, the world deserves better accountability.