“It’s (insert significant shareholder’s name)’s way or the highway” is a common refrain I hear from directors on control block boards.
Under the public offering, 27-year-old Mark Zuckerberg owns almost 60% of supervoting shares, is chair and CEO, can name a successor CEO and has complete control over the nomination process for directors.
The governance debate over control block companies is not new. News Corp., Research In Motion, Hollinger and Magna are all noteworthy for running into governance problems resulting from one person or group having too much control.
When I observe control block boards in action, the dynamic is very different from that of other boards. Directors tell me they really owe their position to the control person, and act accordingly. The shortest meeting I observed was 10 minutes long. The founder said, “Gentlemen (and there were no women in the boardroom, as is also the case with Facebook), this is what I propose to do. Any questions?” There weren’t. “Good, then. Let’s go for lunch.”
Governance is all about checks and balances. From the controlling shareholder point of view, this is his company, his board and his directors. This is fine, but dangerous for minority shareholders and in the long-term if or when things start to go wrong.
I have argued that minority shareholders (the other 40% of Facebook, for example) should have seats at the board table and be there to oversee related party transactions and protect all shareholders including minority ones. They should also be independent from the founder.
But people do things simply because they can. Legal counsel has drafted the S-1 filing giving Zuckerberg as much control as possible. And this is entirely legal.
What is also legal is the lack of diversity on Facebook’s board. California State Teachers’ Retirement System sent Zuckerberg a letter earlier this week urging him to appoint women to the Facebook board and enlarge it in line with its market cap (now estimated at over $100 billion). There is ample evidence that diverse groups mitigate groupthink and strengthen decision-making. Facebook COO Sheryl Sandberg has been a proponent of greater board diversity, pointing out that the figures for women on boards are currently stuck at 15% and have been this way for the last 10 years.
So why would Zuckerberg do this? Well, the Securities and Exchange Commission does not even define diversity. As a result, companies can define it downward to include diversity of “perspective,” “experience” and other factors, while keeping it an all-male affair.
In Facebook’s case, it’s particularly surprising that the board isn’t diverse, considering its customer base includes healthy portions of pretty much every demographic you can think of.
When it comes to governance and diversity, the business reason for addressing the shortcomings above is simple. A good board earns its keep when it prevents the CEO from making that one big mistake. It takes enormous confidence to put people on the board with whom you disagree but whose opinion you respect—if only to keep you from making that error in judgment.
Zuckerberg is a genius in the world of social media, but people make mistakes, are not infallible or irreplaceable, and no one lives forever. Not even 27-year-olds. It’s these truths that governance addresses, or is supposed to.