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.
