Published: Mar 22, 2019 7:00 a.m. ET

Shareholders gave Mark Zuckerberg all the power, and now watch as top executives walk away from his iron-fisted rule

By

THERESEPOLETTI

COLUMNIST 

Mark Zuckerberg seems increasingly alone at the top of Facebook Inc., with executives streaming out the doors as he promises a new direction that seems antithetical to all he has said about the company’s plans for years.

He can, of course, do what he wants, because the company is truly a Mark Zuckerberg production, and because he has always had what Silicon Valley founders crave: founder control of his company. As more executives depart, Facebook appears to be heading further under Zuckerberg’s total rule.

Facebook FB, -1.05% has suffered seemingly endless controversies, including the most recent, hosting a live stream of mass shootings in two mosques in New Zealand. Facebook was alerted by the police in Christchurch to remove the video, which was not found by any of Facebook’s AI engines or humans searching for violent content, contrary to Zuckerberg’s explanation to Congress a year agoabout how its systems are getting better at finding harmful content. Facebook said in a blog post this week that in the first 24 hours of the shootings, it removed about 1.5 million videos of the attack globally, with more than 1.2 million of those videos blocked at upload.

The massacres happened two days after a massive outage and a day after a top executive left amid reported unhappiness with Zuckerberg’s new direction, outlined in a manifesto that was long on words while being short on detail. It appears Zuckerberg has dug himself into a foxhole, where he is following his inner instincts and intuition for the company he started up with his roommates at Harvard 15 years ago. Needham & Co. analyst Laura Martin, citing recent events plus a looming threat of regulation, said the combined risks are creating a negative network effect for Facebook.

Investors who may be unhappy with the continued chaos know their hands are tied even if they don’t agree with how Zuckerberg is ruling over his kingdom. Zuckerberg still controls about 60% of Facebook’s votes. The departure of a key lieutenant — longtime product chief Chris Cox — on top of the loss of the founders of Instagram and WhatsApp, signal growing internal turmoil, with a CEO more alone at the top.

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“There have been some significant high-level departures that have raised a lot of concerns,” said Jonas Kron, who leads shareholder advocacy efforts at Trillium Asset Management, an employee-owned investment-management firm based in Boston. “Then you top it off with New Zealand, and a 12-hour outage, it’s sort of hard to keep up.”

Last October, Trillium submitted a shareholder proposal with the backing of several state treasurers, representing about 5 million shares, asking Facebook’s board to appoint an independent chairman.

“There is a lot going on, and the company would greatly benefit from having Mark Zuckerberg focus on management and execution, and have an independent board chair focusing on the board and relations with investors and board oversight,” he said.

Throughout the many crises that the company has endured following the U.S. elections in 2016, Zuckerberg has appeared to listen to no one but possibly Chief Operating Officer Sheryl Sandberg. The New York Times reported late last year that Zuckerberg and Sandberg ignored repeated warning signs of some of the many problems that have bedeviled Facebook.

There have been anecdotal reports about some Facebook employees looking for new jobs or not feeling comfortable giving dissenting opinions amid Zuckerberg’s tight control. In January, CNBC reported on the company’s cult-like culture and how the fear among some employees to give honest feedback may have contributed to the scandals that have enveloped the company.

Two weeks ago, Zuckerberg surprised investors and users with a more-than-3,000-word pledge to improve privacy, admitting, in the understatement of the year, that Facebook “does not have a strong reputation for privacy.” Facebook now plans to work on a single encrypted-messaging platform, a move that Cox obviously disagreed with by his resignation.

Cox was not the only key executive to depart in the past few months. Last fall, co-founders of both WhatsApp and Instagram left in disagreements over the directions Zuckerberg wanted to take their platforms, a few years after their acquisitions by Facebook. He had initially promised to leave the companies alone, running them as subsidiaries. In Martin’s note, in which the Needham analyst also downgraded the stock to a hold, she highlighted 11 senior executive departures over the past several months.

“A Negative Network Effect suggests that departures will continue, and since we believe that people are a key competitive advantage of FAANG companies, this implies accelerating value destruction until senior executive turnover ends,” Martin wrote. ‘We prefer to move to the sidelines until we see senior employee turnover stabilize.”

The pressure to produce continued revenue growth as well as generate revenue at its other properties, Instagram and WhatsApp, even as user growth at Facebook declines, have led Zuckerberg to make some severe decisions. Those decisions could just lead to more controversies, however.

After his privacy manifesto, which talked about encrypting all messages, many worried that Facebook would be increasingly used for more evil means, and that the company would not be able to police abuses on its network or to help law enforcement. Roger McNamee, an early Facebook investor and co-founder of Elevation Partners, believes that even with encryption of messages, the company’s core business model remains intact. Messaging is “a tiny fraction of the data and metadata that matters,” for Facebook’s business model, he said, because it can continue to glean information about its users for targeted advertising through newsfeed and story activity.

“The manifesto leaves FB’s business model unchanged. That is not acceptable,” McNamee said in an email. “The business model amplifies hate speech, disinformation, and conspiracy theories, with increasingly severe consequences, such as the terrorism in New Zealand.”

Read about McNamee’s new book, which talks about the problems at Facebook and his solutions

Whether Zuckerberg’s decisions and instincts are correct or not, Facebook investors have to trust him. Because he still has voting control, the company’s board and its investors just have to agree or vote with their feet, since they don’t technically have any real say. Some day, Zuckerberg may end up as a poster child for the concept of the gradual elimination of founder control and dual-class shares, a proposal that some officials at the Securities and Exchange Commission support, which would put some sort of time limit on founder control of a company.

Jonas of Trillium believes that is an imperfect solution.

“The better approach is just not to have dual-class at all,” he said. “One share, one vote.”

But while more investors are speaking out against dual-class stock and founder control in public companies, the concept is becoming even more popular as a new wave of major IPOs starts to hit U.S. markets. Ride-hailing app developer Lyft’s prospectus revealed it is going to go public with dual-class stock, with its two founders, Logan Green and John Zimmer, expected to have control. That’s after rival Uber Technology Inc.’s well-documented problems with its controlling co-founder, Travis Kalanick. A D.A. Davidson analyst wrote in a note this week that Lyft gained riders after the spate of scandals at Uber, ranging from a culture of widespread sexual harassment to software used to deceive regulators, that ultimately led to Kalanick’s ouster.

At Facebook’s next annual meeting, likely to be held in May, shareholders will have an opportunity to voice their displeasure with some of Zuckerberg’s recent decisions and his reign in general. But with Zuckerberg’s control and the votes stacked against them, why would they even bother?

“The goal is to give investors the opportunity to express an opinion about whether an independent board chair is a good idea or not and to give the board that information,” Jonas said. “If a majority of outside shareholders agree to that, even if its only 40%, that’s an opinion that I think everyone would agree should be taken seriously.”

Investors need to remember that at founder-controlled companies, when the going gets tough, they don’t really have much say. They can try to send messages to management and the board, through things like shareholder resolutions, but the founder/controlling shareholder always has the final say.