Facebook Inc (FB) Proxy Fight: ISS Backs Call For Independent Board Chair

Facebook Inc (FB) has scheduled its annual shareholder meeting for June 1, and one hot item on the agenda is the call for CEO Mark Zuckerberg to be replaced as board chairman by an independent chairperson. Although the influential shareholder advisory firm Institutional Shareholder Services (ISS) supports Zuckerberg being ousted as chairman, it seems unlikely it will happen.

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Call for Facebook Inc (FB) CEO post to be separate from board chair

Proposal #7 on Facebook Inc (FB)’s annual proxy ballot this year was brought by shareholders, and it’s a call for an independent board chair. ISS rated the company a 10 on its corporate governance scale, which is the highest level of risk, as of January 23. The advisory firm said it had found a number of governance issues that suggest it would be wise for shareholders to vote for an independent board chair.

For example, ISS feels that the multi-class capital structure isn’t in all shareholders’ best interests, and the board isn’t “substantially independent” and it lacks a “formal nominating committee.”

“An independent chairman would serve as a more effective counterbalance to the current leadership structure and provide unaffiliated shareholders with a stronger form of independent board oversight and leadership,” ISS also stated, according to a letter sent to shareholders. “As such, a vote for this proposal is warranted.”

SumOfUs, an institutional investor that owns Facebook Inc (FB) stock, sent a letter to shareholders to call for support of Proposal 7. The firm notes that CEO Mark Zuckerberg has been both board chair and chief executive since 2012, and since that time, it has “weakened” shareholder rights. Further, it says just 62.5% of the company’s board members are considered to be independent. Additionally, the planned change to the share structure, which includes a new set of non-voting Class C shares, makes it even more important for the board chairperson to not also be CEO. The institutional investor also mentioned the controversy over content moderation.

“There is a clear conflict of interest when a corporation’s board of directors, which is responsible for overseeing the CEO and representing shareholders, is chaired by that same CEO,” SumOfUs Capital Markets Advisor Lisa Lindsley said in a statement. “An independent board chair is a necessary first step to put Facebook Inc (FB)’s board on the path to effective representation of the interests of all shareholders.”

Facebook Inc (FB) management obviously opposes Proposal #7, and in their opposing statement, they said, among other things, that forcing a separation of the chairperson and CEO roles could harm the company’s performance “and be detrimental to interests of our stockholders.”

“We believe our board of directors is functioning effectively under its current structure, and that the current structure provides appropriate oversight protections,” the company said in its Proxy Statement. “We do not believe that requiring the Chairman to be independent will provide appreciably better direction and performance, and instead could cause uncertainty, confusion, and inefficiency in board and management function and relations.”

Two reasons Mark Zuckerberg won’t be replaced as board chair

There are two main reasons it seems unlikely that Facebook Inc (FB) shareholders will oust Mark Zuckerberg as board chair. One is because they seemed perfectly happy to approve the social media firm’s move to create a new class of non-voting shares that will enable the founder-CEO to retain control of his company even as he donates shares to good causes.

Certainly, on one hand, his support for charities is commendable, but on the other, shareholders will have even less ability to replace him if he loses his golden touch one day. At this point, Facebook Inc (FB) is battling a lawsuit over the plan to create the Class C shares, so it hasn’t yet followed through with its plan yet, and it probably won’t be able to until after the case is over. The company said in its last 10-K that the trial is scheduled to begin in September.

Trends in activism do not support it

The other reason Zuckerberg will probably be allowed to remain as board chair is actually a broader trend that’s been going on in shareholder activism these days. The Manhattan Institute’s most recent Proxy Monitor report indicated that no proposals brought by shareholders against the 28 Fortune 250 companies during the first quarter received majority support. And last year, only 7% of shareholder proposals received majority support, so clearly, investors don’t usually support their fellow shareholders who bring proposals to companies’ proxy ballots.

Interestingly, the same study indicated that social policies are dominating shareholder activism these days, meaning that shareholders tend to proposal policies relating to social issues such as the environment or charity. This could be a clue as to why Facebook Inc (FB) shareholders agreed to let the company create a non-voting share class to let Mark Zuckerberg retain control as he donates to charity.