There is rising unrest among Facebook's (NASDAQ:FB) institutional shareholder base, with calls for the social networking giant to split its CEO and chairman roles, which could improve Facebook's corporate governance. Unfortunately for investors, Mark Zuckerberg would have to voluntarily agree to any such change for it to pass, but he clearly has no intention of doing so anytime soon.
A full transcript follows the video.
This video was recorded on Oct. 19, 2018.
Dylan Lewis: Evan, it has been a rough 2018 for Mark Zuckerberg and Facebook, and recent headlines from some investors that own a pretty hefty number of shares of Facebook are only going to make things a little bit tougher for him.
Evan Niu: Everyone is upset that Facebook has really botched so many things. They have this nonstop string of scandals and controversies all around privacy and data. People have been asking for a better corporate governance for a long time. It seems like all of these mistakes and controversies are really riling up the investor base, particularly when it comes to institutional investors, to try to push for change. Trillium Asset Management has put forth this proposal that will be up for a vote next year that'll basically split the CEO and the chairman roles. They actually put up a similar proposal in 2017 that failed. But now, they're getting more backing from other public funds. Numerous state funds are starting to support this measure. It's going to boil down to whether or not Zuckerberg agrees to it or not.
Lewis: These are institutional investors that primarily work in public workers and pension funds. That's why they have these very large allocations of Facebook shares. The reality, though, is that it depends on whether Mark Zuckerberg wants this to happen, because of the way that Facebook is set up from a voting power perspective.
Niu: Right. He has about 60% voting power. He can single-handedly vote any proposal in or out. He can vote any director in or out. He's chairman of the board, so he answers to himself, which is kind of the whole reason why, in general, splitting the CEO and chairman roles is good for corporate governance. Of course, the board of directors is supposed to oversee management. Its oversight responsibilities are fundamentally undermined if the CEO is also chairman, because you're your own boss and there's not really any accountability. That lack of accountability, I think, has really contributed to these controversies and these really big scandals that Facebook has had, because Zuckerberg is not accountable to anyone.
Lewis: To use Elon Musk as a parallel here, this is something that's going on with Tesla right now. We're seeing the SEC push for this type of separation to increase accountability.
Niu: The Tesla situation is bizarre because Elon is kind of erratic, and he made some really outlandish statements about taking the company private that the SEC felt were misleading. They essentially argued that he committed securities fraud. Then, as part of the settlement, he agreed to step down as chairman. The net result is that, for Tesla, the CEO and chairman are going to be split up. Elon has been both for a long time. That's actually good news, in terms of corporate governance. In practice, who they pick and whether or not the board actually tries to do its job better, that remains to be seen.
If we come back to Facebook, Zuckerberg doesn't do crazy things like Elon does that are going to get the SEC's attention. You're not going to have that kind of outside force to make him step down. And because he has so much voting power, you really can't do it unless he agrees to it. He has to voluntarily agree to it.
Lewis: Normally, these huge institutional investors want these voting shares of companies that split out their voting shares or have non-voting shares at some point. That is why you see that slight delta between Google voting shares and non-voting shares, or Under Armour voting shares and non-voting shares. If you have enough of them as an institutional investor, and you have people on the inside that do not have a critical mass of voting power, then you might actually be able to wield some change. The reality here, though, is that the stakes that are owned by all these groups combined -- Trillium and these institutional investors on the public side -- combine to about five million shares, which is effectively a rounding error on Facebook's overall shares outstanding. It's nothing on the 60% that Mark Zuckerberg holds in terms of voting power.
Niu: Right. He has these super voting Class B shares, they get 10 votes per share. He basically has all of the Class B shares. He has like something like 95% of all Class B shares. It's kind of a grim outlook for investors. It's pretty obvious that all the while these investors have been making these arguments, very conventional arguments, saying, "This is better for corporate governance. This will be good for investors." Facebook just doesn't care. They just don't listen to the reasons. I don't know what's going to get through to Zuckerberg, but the company has defended this setup for a long time. As I mentioned before, they voted against this in 2017 and basically said that they still think that the best and most effective leadership model is that Zuckerberg is both chairman and CEO, and that's the way they've always done it, and that's what's helped them get here today. But it's pretty clear that in a lot of ways, it's not working well. We're starting to see investor unrest and people getting upset about it, but there's nothing they can do.
Lewis: Yeah, barring Mark Zuckerberg recusing himself from the vote, his votes will be cast in a certain direction, I think we can be pretty sure. All of this really highlights the importance of corporate governance and the importance of understanding the ownership structure of the stocks that you're owning. We spend a lot of time when we're doing those IPO shows looking at inside ownership and how that's held. We spent a ton of time talking about that with Snap in particular. It can sound like a very academic discussion sometimes. This is exactly why it matters, though.
Niu: It's also worth remembering that Facebook even tried, a year or two ago, to give him even more voting power when they wanted to create this third class of non-voting stock. Then they got sued by all these investors and essentially just dropped the plan. But the point is that obviously, wanted to take it even further, give him even more power so he could continue selling off his stock to fund his philanthropic interests but keep all his power. It's pretty clear that they just don't listen to public investors at all.
Lewis: Yeah. I think by and large, Trillium and these public funds know that they are more raising an issue than creating any change. It's obvious that they're not very happy with Facebook's management.
Before we wrap up, Evan, I put out that we were talking about some of these companies on Twitter. I want to take a listener question. This one comes from Austin, who has asked us a couple of questions before. He says, "What product is worse, Snap's glasses or Facebook's Portal, given the company's recent privacy issues?" What's your take on that one, Evan?
Niu: Facebook's portal is definitely worse. [laughs] There are so many privacy concerns for Facebook as a company. Whereas Spectacles, they're kind of a silly product, but as you mentioned before, Snap doesn't have this crazy targeting reach into all these aspects of your life that Facebook has. I'm not as concerned about privacy issues there. It's more of just a way to use the platform. Whereas Facebook's Portal is very specifically yet another way for the company to gather data on you.
There was a really shocking reversal the other day when. Initially, Facebook said the Portal would not be used to gather data for ad targeting purposes. Then, this week, they completely changed their stance, like, "Oh, wait, actually, we will." [laughs] Or, "We can, but we don't want to," which doesn't really reassure people that don't trust Facebook anymore. On top of that, Facebook is reportedly working on this other type of Portal device that goes on top of your TV that has a camera in it that does the same kind of video calling and Watch platform stuff that Portal wants to do. They're clearly going to keep pushing in this hardware direction. But they're going to use this to target you with ads, even after they said that they wouldn't. [laughs]
Lewis: For me, both of these bother me for different reasons. The Facebook Portal and the launch of the Portal comes at a time where you shouldn't be putting cameras in people's houses. They don't trust you. [laughs] But, what bothers me about Snap is the financial diligence that we want them to be having, looking at what's going on with the cash side with them. They are a distracted business that probably needs to rein in its spending if they're going to be hitting the targets that Evan Spiegel wants them to hit and. I look at it, and I'm like, you guys aren't really eating your cooking when it comes to this stuff that you're talking about in your conference calls. So, Snap bothers me from a financial perspective. Facebook Portal bothers me a lot more from a public perception perspective. I guess that's all to say that we won't be giving each other either for this holiday season, Evan.
Niu: [laughs] Yeah, I'm definitely not buying a Facebook camera to put in my home.