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If Facebook (NASDAQ: FB ) shareholders want to give their two cents on executive pay packages, they're going to have to wait three more years to do it.
According to proxy vote results filed in an 8-K on Thursday, the vast majority of votes cast at Facebook's annual shareholder meeting indicated a preference to hold a "say on pay" vote only every three years.
But do these results indicate the preferences of average outside shareholders? I think not.
Facebook reports that the voting tallies on its "say on frequency" votes were as follows:
- One Year: 533,816,915
- Two Years: 14,888,902
- Three Years: 5,558,676,699
- Abstentions: 6,553,502
- Broker Non-Votes: 653,253,525
A closer look
It's clear that the vast majority of votes cast indicated a preference for holding a "say on pay" vote only every three years. However, a closer look suggests that average outside shareholders prefer to have an annual say.
According to the 8-K filing, there were 536,654,614 B shares present at Facebook's meeting in person or by proxy. Now, recall that Facebook's dual-class voting structure dictates that B shares get 10 votes per share, while A shares – of which there were1,400,635,758 present -- only get one vote per share.
Given that most B shares are owned by management (and all are owned by insiders), I believe we can assume that they were all cast according to management's recommendation for a three-year "say on pay." If this is indeed the case, then only 192,130,559 A shares -- about 13.7% -- were cast in favor of a triennial "say on pay" vote.
Certainly not a ringing endorsement.
Management's flawed argument
In its 2013 proxy statement, Facebook's board argues, "a triennial vote complements our goal of creating a compensation program that enhances long-term stockholder value" and that "[t]riennial votes will allow our stockholders to evaluate the effectiveness of [our] long-term compensation strategies and related business outcomes of our company for the corresponding period, while avoiding over-emphasis on short-term variations in compensation and business results."
Here's why I think that line of thought is particularly flawed in Facebook's case.
The voice of average outside shareholders is already dramatically diluted by its dual-class voting structure, which I believe already makes for proxy voting results that favor management. Reducing the "say on pay' vote to every three years further dilutes the voice of shareholders. When shareholders are dissatisfied with their executive pay strategies, their disapproval becomes more compelling if it is reiterated on a yearly basis.
Consider Nabors Industries, where a majority of shareholders voted against the company's executive compensation packages for the third year in a row. I believe their message is all the more powerful given its repetition. By only allowing a triennial vote, Facebook is narrowing shareholders' opportunities to express their dissatisfaction, making it all the more difficult for them to put constant pressure on management to better represent shareholders.
Warning to investors
I believe investors should always be wary of businesses with a dual-class voting structure -- even at companies like Google, which gave its shareholders much better returns after its first year as a public company than Facebook did. At these companies, there's always a risk that those who control the vote will see the company as belonging to them rather than to shareholders as a whole.
On the other hand, there is some merit to the argument that shareholders with a short-term mentality can push management to do things that compromise long-term returns. This is one reason I actually embrace the dual-class voting structure at Berkshire Hathaway -- especially given that Berkshire doesn't give insiders exclusive access to the shares with the most voting power. Also, Warren Buffett doesn't just inspire confidence with his track record of building strong gains for investors. His notorious candor with his investors and his willingness to solicit public challenges to his leadership and to offer thoughtful answers to those challenges give me confidence in the company's future performance, even though my B shares don't give me the same voting power as those with A shares.
When evaluating potential investments with a dual-class voting structure, I urge investors to pay particular attention to management's attitude toward shareholders. If management ignores dissenting views and tries to limit opportunities to present them (as Facebook has done by limiting the "say on pay" vote to once every three years), I believe investors should be reluctant to invest.