When an entrepreneur graduates from start-up CEO to head of a public company, typically the new role comes with a host of new management challenges—answering to a board, for one, not to mention shareholders.
But Mark Zuckerberg isn't your typical CEO.
It's natural for founders to have some degree of control freak in them—they've got a lot on the line and want to make sure their baby succeeds. Zuckerberg, however, takes the concept to a new level. Thanks to some savvy maneuvering, he'll maintain an iron grip on Facebook even after it goes public.
Zuckerberg's level of control goes far beyond that of most CEOs. According to Facebook's SEC filings, between his own shares and those that he will control through agreements, he will govern well more than half of the votes that shareholders can cast. Here's the explanation that Facebook's lawyers put into the paperwork:
Mr. Zuckerberg, who after our initial public offering will control approximately 57.3% of the voting power of our outstanding capital stock, will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors, as well as the overall management and direction of our company. In the event of his death, the shares of our capital stock that Mr. Zuckerberg owns will be transferred to the persons or entities that he designates.
Because Mr. Zuckerberg controls a majority of our outstanding voting power, we are a "controlled company" under the corporate governance rules for NASDAQ-listed companies. Therefore, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function and to have the full board of directors be directly responsible for nominating members of our board.
This has some interesting and, for potential individual investors, disturbing ramifications. For example, Zuckerberg would have absolute control over any of the following issues that might come before shareholders:
As the filing goes on later to point out, board directors have fiduciary responsibilities to the shareholders. So does Zuckerberg, and he must act in good faith for the best interests of the shareholders. However, as a shareholder, he has no obligations to anyone else and can vote his shares—and make absolute determination over key issues—however he wishes, whether it is good for other shareholders or not.
For founders to maintain significant say over their companies when they go public isn't unusual. CEO Mark Pincus controls about 36.2% of the total voting power for Zynga. When Google went public, Larry Page, Sergey Brin, and Eric Schmidt held 40.9% of the votes in that company. A dual stock class structure has become high tech's vehicle of choice to keep control. Both Zynga and Google did it, as did Groupon, LinkedIn, and Zillow. The Google triumvirate at this point (after additional stock awards) has a 57.7% voting block, and still the company created yet a new class of common stock with novoting rights because, as Brin and Page wrote, "we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world."
In other words, they don't want anyone else to have a say.
And still, Zuckerberg's situation remains unique because such absolute voting control in the hands of a single person after a company goes public is virtually unheard of, at least in a major corporation.
So, just how worried should shareholders be?
Some pundits say Zuckerberg has become a mature CEO in his mid-20s. It's true that he's grown up some since his Harvard and early Facebook days, if any number of the stories from that period are true.
Yes, he's been successful so far. But this is also the young man who negotiated a $1 billion acquisition of Instagram without talking to his board about it in advance. The same young man who dressed in a hoodie while meeting Wall Street bigwigs.
Now, I'm not suggesting that Zuckerberg should be judged by his sartorial choices and lack of convention. Making mistakes is human.
That's why public companies have checks and balances. Boards of directors exist to provide oversight of management, pay attention to the varied and often conflicting needs of shareholders, and hire (and sometimes fire) chief executives. The CEO generally must pay attention to the board, and a smart leader wants a strong board that can offer collective business wisdom. But when the CEO can hire and fire the board, the check will bounce.
How soothing it would be to think that Zuckerberg would eventually have to answer to a board and shareholders in at least some ways. But as long as he can reasonably say that he's fulfilling his fiduciary obligation to shareholder interests, then, no, he really doesn't. The Instagram acquisition without the full participation of the board in the process—a board representing institutions that have invested $2.24 billion into the company—already shows this inclination.
Oh, if things got really bad, shareholders could sue the company, but it becomes a cost of doing business, and the company pays for the insurance to indemnify the board members and officers, including Zuckerberg. A public fuss that causes embarrassment might be another corrective mechanism, but only if the CEO cares.
Zuckerberg has the luxury to care only to the degree that he wishes. For better or worse, that will pervade his legacy.