ISS on Facebook governance: Balkanized ownership

The rush of criticism about corporate governance at Facebook continues.

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Almost immediately after the company filed its S1, CEO Mark Zuckerberg’s 57 percent voting rights were noted with concern. Now, Institutional Shareholder Services (ISS) is weighing in, and what it has to say isn’t pretty.

ISS starts with the obvious, as reported by the San Francisco Chronicle: Zuckerberg’s control ‘following a planned public stock offering diminishes shareholder rights and board accountability’. Further, ISS criticizes Facebook’s dual-class shareholder structure, which contributes to the CEO’s control of the votes.

Ultimately, the near-term benefits to Zuck and the other leading shareholders could become problematic later on. ISS says, ‘The adverse implications of Balkanized ownership interests can linger for years.’

The latest crop of internet companies may not reveal the particular difficulties they’ll face for a while – after all, Zuck is only 27. Mark Pincus, CEO of Zynga, which has a more egregious shareholder structure, is ancient by Silicon Valley standards, at 45. They have plenty of time to dominate their companies, and some early successes will buy them elbow room later on.

Even if shareholders tolerate what ISS calls ‘an autocratic model of governance’, the greater risk is a lack of perspective that can impede strategic change. As with Hugh Hefner at Playboy and the Bancroft family at Dow Jones, concentrated ownership and voting can militate against making the right decisions. Whether the likes of Facebook wind up suffering a similar fate remains to be seen.

There’s another history lesson to keep in mind, as we take a look at how Facebook is proceeding with its governance structure and its IPO: investor expectations. We’re seeing that, more than a voice, investors want returns – they want to be heard only when returns lag expectations. Under the current structure, it seems, Zuck’s job is to keep investors happy through returns, lest they speak with their capital.