Resisting the Facebook Nation

The Facebook IPO has captured the public's attention. However, potential investors should think twice about plowing their hard-earned money into a company that's run like a banana republic led by Mark Zuckerberg.

One nation under Zuckerberg
Facebook Nation: You're surrounded by friends! You can shoot the breeze, "like" stuff, or "farm" without getting your hands dirty or breaking a sweat. Forget sending postcards about your life; you're building a vast repository of digital data about it.

However, this "free" nation has some troubling elements. Mark Zuckerberg's not renowned for being deeply respectful of privacy (recall 2010 claims that he "doesn't believe in it"), so it wouldn't be too surprising if one day everybody you've friended (and maybe even quite a few you haven't) knows your hopes, dreams, and whether your morning's incomplete if you haven't belted out "Day-O (The Banana Boat Song)" at the top of your lungs in the shower.

I like hanging out in Facebook Nation, too. Still, "it" knows a lot about me. It recently served up an ad for a Squishable Cthulhu ("HUG IT!") plush toy, implying it knows I "like" H.P. Lovecraft. However, I had to question a recent ad begging for volunteers to participate in a gout study, since I don't have gout. (Or do I? Kind of scary, Facebook.)

Most of these complaints are mitigated by the fact that Facebook is a free service, and theoretically, if you don't like it, you can leave.

Those who invest in Facebook's IPO, though, are hinging their money on the company's future growth. And from a corporate governance standpoint, think twice about what potential ownership would really mean, and whether Facebook's future growth could be curtailed by some despotic policies and concentrated control.

Tally me banana (that's right, just one)
The bullish news: Facebook does generate revenue (a whopping $3.7 billion of it in 2011), and it's profitable (it generated an amazing $1 billion in profit last year), putting many unprofitable IPOs to shame. (Speaking of games like FarmVille and Words With Friends, Zynga (Nasdaq: ZNGA  ) represented 12% of Facebook's revenue last year. You and your friends are definitely helping fertilize Facebook's crops.) It's easy to see why these great numbers excite many potential investors.

However, let's return to the banana republic concept: Facebook's dual-class stock structure makes shareholders second-class citizens. Management owns a separate class of shares that pack a heck of a lot of voting power, with those Class B shares representing 10 votes each; shareholders like you and I would only possess one vote for every Class A share we held.

Chairman and CEO Mark Zuckerberg owns the majority of Facebook's voting stock, controlling the outcome of any issue that comes before a shareholder vote -- director elections, mergers, sales, and so forth. In other words, regular Facebook shareholders will have no sway.

Dual-class stock structures are common at media companies and technology companies, which have reasons to want to keep control. LinkedIn (Nasdaq: LNKD  ) , News Corp. (NYSE: NWS  ) , New York Times (NYSE: NYT  ) , and Google (Nasdaq: GOOG  ) all have dual-class stock structures in place.

It's easy to understand the reasoning, but the practice is clearly shareholder unfriendly.

In another rotten angle, once Facebook's Class B shares are outnumbered by Class A shares, its board will convert to a classified, or staggered, board. Directors will be split into different classes, and only one class will be up for reelection every year. That's good for management and directors retaining their power, and bad for shareholders.

It's good to be the (boy) king
When companies' chief executive officers also serve as chairmen of the board, suspect that those boards won't be particularly independent (or terribly inclined to push back against management). Mark Zuckerberg possesses both titles.

Facebook has taken the "controlled company" exemption on corporate governance rules. It isn't required to have a majority of its directors be independent, nor does it have to have a compensation committee or an independent nominating function.

As for Zuckerberg: He's 27 years old. Clearly he's intelligent; Facebook wouldn't exist if he wasn't. However, his youth could be questionable from a shareholder standpoint. Granted, his letter in the Form S-1 IPO filing outlines some truly lofty ideas.

These include the transformative power of sharing information on institutions and industries, the fact that relationships expose us to new ideas and create happiness, and the idea that giving so many people empowered digital voices could make governments more responsive to more people's needs than ever before.

Then again, Zuckerberg later reveals a few of the principles of the company's culture, called "The Hacker Way." A few highlights: "Move fast and break things," and "The riskiest thing is to take no risks."

Occasionally Facebook sure has "moved fast and broken things," tempting Facebook users to defect. The "timeline" feature that's currently being rolled out could break the experience for many users, for example.

There's a fine line between youthful boldness and taking too many liberties at core users' expense and risking losing way too much user goodwill. Check out this AllThingsD piece: "The Apologies of Zuckerberg: A Retrospective" for a good "timeline."

Facebook still occupies the space where Friendster and MySpace learned very hard lessons, after all.

Will you kiss the ring?
Every investor makes his or her own decisions about the companies he or she wants to own and why. I bought shares of Google for the Rising Star portfolio I'm managing for Fool.com; despite Google's dual-class structure, I basically trust its management although I dislike the dual-class setup on principle.

Still, I'm reluctant to dedicate capital to a company with shareholder-unfriendly policies and a leader who is young, brash, shows the tendency to throw caution to the wind when it comes to users' privacy, and possesses that much control. Sorry, Facebook.

Facebook's a nice place to visit, but I wouldn't want to be a long-term shareholder and commit to living there. Would you?

If you're interested in the Facebook IPO, maybe you're also interested in technological innovations of many kinds. Check out "The Only Stock You Need to Profit From the NEW Technology Revolution," available free right now -- it won't be forever, so don't wait.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of LinkedIn and Google. Motley Fool newsletter services have recommended buying shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (33) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2012, at 2:56 PM, wolfman225 wrote:

    I guess I'm hopelessly out of touch. I've never really seen the fascination with social media to begin with. I had no MySpace, I don't Tweet, and my Face isn't in any Book (not even mug shots).

    I'm continually astounded at the personal information people voluntarily post, naively believing that only their "friends" will have access to it; driven, I believe, by an unhealthy preoccupation with fame.

    I'll never give any one person or corporation that much power over me. I'll stick with email for casual contact and updates among my few real friends. For business, it's either a professionally formated letter or a phone call. For important personal issues, nothing beats a hand-written letter or in-person visit.

    I may be missing out on out-sized gains, but I just can't see supporting any enterprise that's so potentially damaging to individual privacy.

  • Report this Comment On February 10, 2012, at 3:14 PM, TMFTomGardner wrote:

    My suggestion, if you want to get in the game, is to sign up for Twitter. Don't expect to send out any tweets. You don't have to. 99% of the value is in finding people in your fields of greatest interest and following them. To me, Twitter is simply astounding. An opera singer can follow the career of singers and teachers around the world in ways never previously imaginable. This is changing the way the world consumes information, learns, and communicates. And when you have hundreds of millions of people around the world using a new tool....it usually pays to understand it and use it. Mind you, I understand the curmudgeonly approach....but in some of these cases, I think it'll cause you to miss out on a lot of very remarkable things about our world. - Tom Gardner

  • Report this Comment On February 10, 2012, at 3:33 PM, blesto wrote:

    You can keep your Facebook and the IPO.

    I like hanging out here at The Fool.

    But after what Tom G. said about Twitter, I'll have to reconsider my decision about staying out of the Twittersphere.

    Heck, I still don't have a smartphone yet. Just a no frills cellphone. So when I do get one, I may sign up with twitter, but I still wouldn't touch Facebook with even your smartphone.

  • Report this Comment On February 10, 2012, at 3:49 PM, TMFLomax wrote:

    Agreed that Twitter is an amazing informational tool. I find TONS of awesome information on very specific topics (like corporate governance, or SRI, for example!) there. And yeah, I follow more than I Tweet, like Tom G. said.

    Alyce

  • Report this Comment On February 10, 2012, at 4:07 PM, TMFLomax wrote:

    Oh and another thought on the comparison to Twitter. I *used* to think Facebook was a wonderful source of information, whether it was cool things my friends were up to, their big life events, or awesome content they found around the web that I never would have known about. Here lately, whatever's been tinkered with, has made it far less useful for me -- I see maybe a small percentage of what's being posted by my friends in my news feed in Facebook. Maybe it's that my settings are wrong, but that continuous feeling that you have to go mess around and change settings (not to mention make sure that nothing changed in the privacy settings that you have to adjust AGAIN) is a sub-optimal user experience IMHO. This has nothing to do with corporate governance issues, but I think it does have to do with degrading user experience. Anecdotal on my part, but I also think its "move fast and break things" ethos really might break some things eventually.

    Alyce

  • Report this Comment On February 10, 2012, at 4:11 PM, lemoneater wrote:

    Somehow when I hear the word gout I think of elderly gentlemen who eat too much rich food and drink too much port--more like something that might afflict a Dicken's character on a bad day. I've read about it so much in old literary works I thought it was an archaic term, but, alas, my husband said people can still get gout. I think diet and exercise greatly reduces one's chances so take heart, Alyce!

  • Report this Comment On February 10, 2012, at 4:31 PM, ET114 wrote:

    FB is a cult... amazing part is that there might be 500 million "friends"... never ever provide real profile info, no home address, no phone, no personal info; my birthday year is 1924... thus, I'm not a statistic for there marketing scheme...

  • Report this Comment On February 10, 2012, at 4:43 PM, TMFLomax wrote:

    lemoneater, gout also reminds me of Dickens or perhaps even as archaic as Henry VIII. Ha! Seems like an odd thing to see mentioned in a FB ad... (maybe its algorithms have figured out my poor diet and exercise habits! ;) Do need to work on those...)

    So glad to see you back posting in Fooldom! :) Made my day. Hope you have a wonderful weekend!

    Alyce

  • Report this Comment On February 10, 2012, at 6:39 PM, wjcoffman wrote:

    How can you possibly know how many friends you have or potential friends you could have if you don't have an account? Who else do you share your uneventful, sedentary life experiences with if you don't have an account?

    The friends I apparently do not have who have FB accounts marvel at their reacquainting themselves with women they knew before they had the LAW (Loving Adoring Wife). I'm no moral compass but that's enough of a recipe for disaster to keep me away.

    I do pride myself in NOT buying products from companies that encourage me to get their coupons off FB. To me it's like a company advertising during a TV program that I find to be objectionable.

    LONG: GOOG

  • Report this Comment On February 10, 2012, at 7:25 PM, TMFLomax wrote:

    ET114, I have run across a decent amount of aliases... I mean if somebody's named Frankenstein, I'm pretty sure that might not be their real identity. Haha. Yeah there are plenty of people who do get around some of the privacy issues.

    wjcoffman, point taken about other sort of more objectionable sides of FB as well as the idea that the advertising element in the medium probably turns some people off more than convinces them to buy.

    Alyce

  • Report this Comment On February 10, 2012, at 8:01 PM, goalie37 wrote:

    I was going to send you a friend request, but couldn't find Alyce Lomax on FB.

  • Report this Comment On February 10, 2012, at 8:06 PM, Acesnyper wrote:

    I know in my mid 20s I'm a much younger poster than most on Fool, but I'm happy to see I'm just the only one of my age not the only one left one earth who is not fond of Mr. Zuckerburg or his work.

    I do feel it's quite cultish as mentioned before, not having one to my peer age group is a red flag of sorts.

    One I wave with pride, I'm old fashioned, I like telling my friends what's up, instead of leaving them statuses or the such.

    Social media is just so anti social to me.

  • Report this Comment On February 10, 2012, at 8:15 PM, wolfman225 wrote:

    <<<Mind you, I understand the curmudgeonly approach....but in some of these cases, I think it'll cause you to miss out on a lot of very remarkable things about our world. - Tom Gardner>>>

    Point taken. I'm not really anti technology, nor a techno-phobe. I'm just the product of a simpler time. I'd rather have a life full of real experiences shared with a handfull of close friends than spend my leisure time exchanging profile fabrications with a couple thousand "FB friends" and running a virtual 2nd life in Farmville.

    BTW--"curmudgeonly" is one of my favorite archaic words. Thanks.

  • Report this Comment On February 11, 2012, at 6:31 AM, Clint35 wrote:

    You make a lot of good points Alyce. But my main reason for not investing in fb at this point is because it's too soon. Even though the company is profitable it could easily turn out to be a fad that suddenly disappears. If Zuckerburg starts moving too fast and breaking things they could lose a lot of likes and BFFs. Without all those people on fb the company would be worthless.

  • Report this Comment On February 11, 2012, at 7:37 AM, ET114 wrote:

    TMFLomax... so, net net... why would any sane investor buy FB? Maybe because it'll be a GOOG which is beyond comprehension @ $600+/share. It's a search engine and sales/ads blitz with email, maps, and driving instructions, first 20 instructions, how to get outa my hood...

  • Report this Comment On February 11, 2012, at 8:40 AM, TMFLomax wrote:

    Yeah I didn't get into valuation much here, more the "qualitative" approach. Then again, when this thing goes public, I doubt that valuation is going to matter much to the people who buy in. I have a gut instinct it is going to be insanely overvalued at first and it'd be better to wait even if one is not worried the growth might stall (for whatever reasons).

    Then again, I was very nervous about GOOG when it first went public, and see how that worked out. ;) People may do very well on this IPO, I'll admit that, but at the same time, the things that bug me about governance, management and that yes, occasionally social media can be a little "antisocial" is enough for me to think everybody should count to 10 before jumping into this one right away.

    Alyce

  • Report this Comment On February 11, 2012, at 8:49 AM, TMFLomax wrote:

    P.S. goalie37 - I have NO idea why you couldn't find me on there... my profile is pretty locked down, but anyone should be able to send me a friend request. Maybe I'll check more of the settings...

    Alyce

  • Report this Comment On February 11, 2012, at 2:01 PM, lowmaple wrote:

    Facebook: May be good for a quick buck, but i abhore the privacy issues. That Zuckerberg is brash and young, but Steve Jobs was once young and still brash to his last days. But your right. The unfettered control of the company is scary.

  • Report this Comment On February 11, 2012, at 5:36 PM, hbofbyu wrote:

    Never in the history of the world has so much control over information been placed at the hands of so few. The intentions of the brain trusts at these companies do not matter. They will tell you that they are just facilitators, the messenger, and that "the users, the public, the people" control twitter and facebook because it is a place to express yourself, be free - it's pure democracy. Pure democracy without checks and balances is more dangerous still.

    Someday, a few lines of code manipulated to create misinformation, or re-routing or blocking of tweets of a specific demographic or group could result in revolution, mob rule, chaos, anarchy... all the things that are the historical rule, not the exception.

    Maybe someday Google will go to war with the Chinese government.

  • Report this Comment On February 11, 2012, at 8:22 PM, stan8331 wrote:

    I have never been a fan of Facebook. The user interface is needlessly complex, the privacy controls are inadequate and/or inscrutable, and the music functionality is still inferior to MySpace, even at this late date.

    I think Facebook's ascendance is primarily attributable to MySpace's ineptitude. MySpace was overrun by spammers and rogue accounts, and people started to migrate to Facebook as a seemingly safer, less chaotic alternative. At this point, even most of us who are not Facebook enthusiasts have accounts there because the network effect is so strong. It's where virtually everyone can be found.

    As an investment, the lack of functional superiority combined withlikely the concentration of power and what's sure to be a very high price tag make it far too risky for me.

  • Report this Comment On February 12, 2012, at 11:16 AM, jrj90620 wrote:

    Zuckerberg is intelligent, but is he wise?I think Steve Jobs was both,but time will tell about Zuckerberg.

  • Report this Comment On February 12, 2012, at 12:41 PM, exileonmainst wrote:

    I won't comment on the utility of social media. Whether its chatting up your neighbor while taking out the trash or FaceBook, whatever floats your boat. As a businessman, I pay a mind; as a private citizen, I'm skeptical.

    However, I won't be riding with the herd when FaceBook's IPO goes down. Besides the substantial risk of some of their streams of income leaving, huge competitors gearing up for all out war and a clampdown due to privacy concerns, I'm just put off by dual class share structures.

    There are too many other opportunities using the tools that I've been taught by the Fool that will satisfy my investment requirements without having to participate in a half baked philosophy that is creepy at best and unconstitutional at worst!

  • Report this Comment On February 12, 2012, at 11:27 PM, Risky88 wrote:

    Iv got a friend who left his facebook page up. But vowed not to even touch it for a year!

    Once a week or two I would write what day he was on, no one knew what the heck I was talking about,kinda funny.

    Anyways

    lasted about 6 months.

    epic fail

  • Report this Comment On February 13, 2012, at 12:27 AM, goalie37 wrote:

    I use Facebook, but I will not be putting money into the IPO. Yes, the company is dominant in the area where it operates, has a valuable brand, and as much of a moat that can be had in the technology area, but I will need to see several 10q's and 10k's. Until then, I will remain an avid user and nothing more.

    Alyce, you can friend me on there next time you are on. I should be the only Bill Stevenson in Los Angeles with a picture of a bald guy in a sport coat lol.

  • Report this Comment On February 13, 2012, at 8:27 AM, edmond5 wrote:

    What drives me crazy is my local news station WPSD in Western Kentucky. I understand they're trying not to be technologically left behind, but they've turned EVERYTHING into a: "tell us what you think" on FB segment. It's Valentines Day...tell us what you think on FB. We just had our first commercial...tell us what you think on FB. There's a tornado headed your way...tell us what you think on FB. I swear it takes up half the newscast. Regardless of fundamentals/technicals I hate FB out of spite: ) Probably will never invest in it. Anyway, good article.

  • Report this Comment On February 13, 2012, at 11:37 AM, catoismymotor wrote:

    Thank you, Alyce for a well thoughout article.

    In my opionon the best chance FB has at surviving long term is for D.J. Zucky Zuck to cash out most of his stake and hand over the reigns to a seasoned management team. But I doubt he'll do that for a few years, until it's possibly too late for the company.

    Zuckerberg is too young and egotistical not to *move fast and break things*. The question is what will he end up breaking and how fast will it come back to haunt him. Somehow I'm reminded of an Italian cruise ship and a known risk taker for a Captain.

    -Cato

  • Report this Comment On February 13, 2012, at 12:25 PM, FelixHoenikker wrote:

    Never used FB

    No plans to use it in the future.

    No plans to buy it either.

  • Report this Comment On February 13, 2012, at 3:17 PM, Hawmps wrote:

    Resistance is futile... you will be assimilated.

    Ha ha.

    Seriously though, I think the FB IPO will bring with it a slew of "brand new investors" in the form of young FB users because they can own a piece of they're favorite pass time. This could bring about a seriously overvalued company because of demand from first timers to just have a piece of it. Maybe after the hype cools and they pay a dividend.

  • Report this Comment On February 13, 2012, at 3:49 PM, TMFLomax wrote:

    Thanks for all the great thoughts, folks, please keep 'em coming! I like the comparisons to Steve Jobs actually... I'm currently (slowly) reading the Isaacson biography of Jobs. Knew he was an "interesting" personality but wow, the bio really sends the message home. Kind of think these are people who can be brilliant in some ways, but also need to be sort of "corralled" or toned down by the people around them, but then again, that can be difficult to do (as it was difficult to do with Jobs, apparently).

    Cato - "D.J. Zucky Zuck" ha! Love it. And totally agreed about the known risk taker/cruise ship analogy. SOS. Whew.

    Stan8331, Good call: "The user interface is needlessly complex, the privacy controls are inadequate and/or inscrutable, and the music functionality is still inferior to MySpace, even at this late date." I haven't used the musical functions, but I do agree on the interface and the privacy controls!

    Thanks again for all the great feedback on this, everyone!

    Alyce

  • Report this Comment On February 14, 2012, at 4:33 PM, DJDynamicNC wrote:

    Facebook is an invaluable tool for my business, I have to admit. We still use traditional flyering and advertising but putting the event up on Facebook means our whole target market knows about our events in a matter of days. Very efficient and it's contributed to a resurgence in attendance (which has been very nice for us). We could do without Facebook, but it would be a serious hill to climb.

    That said, I don't consider it much of an investment opportunity. And I absolutely HATE the Timeline adaptation.

  • Report this Comment On February 14, 2012, at 4:41 PM, TMFLomax wrote:

    Interesting, DJDynamicNC! Actually that is very thought-provoking about how social media helps your business's events so much. Makes total sense.

    (And agreed on the timeline adaptation. I don't see how that's going to be helpful to anyone. It's so fussy, busy and confusing.)

    Alyce

  • Report this Comment On February 15, 2012, at 11:48 AM, DJDynamicNC wrote:

    The thing about Facebook is that it's a giant amplifier for word of mouth, which is far and away the most effective form of marketing. Everytime somebody marks themselves as attending your event, it notifies their friends automatically. It's highly effective.

    I love Twitter but I use it more for personal edification rather than promotion. It's good fun and can be very informative. Avoid it while drunk, though. :lol:

  • Report this Comment On February 15, 2012, at 5:13 PM, XMFHRFool wrote:

    I always forget about Twitter and end up only checking it when I have something to tweet about. My blog tweets automatically and also posts to my FB page for me.

    I'm a huge lover of FB though! Since I'm prior military, I've been able to reconnect with all of my old Navy friends that I'd lost touch with after I got out in 1997. We feel like we're actually part of each other's lives again even though we live all over the country. It's wonderful. Through a combination of Ancestry.com and FB, I've also found three half sisters that I didn't know about until last summer and we're also connected on FB. And, I keep up with the activities of my little 2nd cousins who live in Florida that I rarely get to see and people that I met while vacationing in Italy. For families who are spread all over the world now, it's fantastic.

    I think it will be interesting to watch what happens to FB over the next few years...I'm out for now because I think the IPO could be crazy and I want to see what happens to the company and Zuckerberg after they go public, but I could definitely be in later...

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