An increasing amount of attention is being paid to Facebook, Inc. (NASDAQ: FB)’s dual-class share structure, which now puts complete control in the hands of management. The most recent proxy season highlights the impact of this structure as data collected by the Manhattan Institute reveals that not a single one of the proposals brought by activists was passed.
Facebook management with complete control
In order for any proposal to pass at Facebook, management must approve it because CEO Mark Zuckerberg and other insiders hold 58% of the voting control. The proposals brought to the May 30 annual meeting by shareholder activists include one suggesting that each share have an equal vote, which was brought by Northstar Asset management.
NYC Pension Funds and co-filers brought a proposal calling for an independent board chair. Undisclosed proponents brought proposals about content governance, majority vote standard for director elections and a true diversity board policy, according to the Manhattan Institute.
James Copland of the Manhattan Institute notes that Facebook isn't the first tech company to move to a dual-class share structure which preserves voting control for founder and/or management. The purpose of such a structure is to insulate boards and management from shareholder activists and their attempts to change corporate behavior.
Dual-class share structures as a response to regulation
Critics of dual-class share structures say they're unfriendly shareholders, and Copland said some opponents have even cited empirical evidence to support their claims. However, he sees it differently and comes out in defense of companies with dual-class share structures.
"It's not a bad idea to have competing ownership models in the market," he told ValueWalk in an email. "Investors who are worried about dual-class ownership don't have to buy shares in companies with these ownership structures!"
It seems pretty clear that most investors aren't very worried about dual-class share structures because a significant number of companies have adopted such ownership structures over the years. Copland thinks this trend represents more than just a desire to keep the voting power of a company in the hands of management.
"To me, the trend toward dual-class ownership is an indictment of current regulations' overemphasis on shareholder input into public companies' management prerogatives," he said. "Many private ventures have resisted public offerings for parallel reasons. SEC rules have empowered shareholder activism, including by actors with limited company stakes -- and by proxy advisers, index funds, and public pension funds with little incentive to get corporate governance right. That entrepreneurs with every incentive to maximize their economic returns are trying to insulate themselves from these forces is a strong indicator that the SEC needs to rethink its regulatory regime."
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