Powerless Majority

Facebook Election Turns Into a Protest

Many stock owners not named Zuckerberg vote against his supervoting power.
Photographer: David Paul Morris/Bloomberg
As of 10:23 AM EDT
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For most companies, adhering to the gold standards of shareholder democracy doesn't matter. Until it does. 

That's worth remembering in the case of Facebook Inc., where the shareholders did the corporate election equivalent of storming the king's castle.

Among those who cast ballots in the company's annual stockholder election last week, about 79 percent of shares not controlled by Mark Zuckerberg voted in favor of a proposal to wipe away a special class of stock that gives him majority control of Facebook. 

Unhappy Election

About eight in 10 votes cast by Facebook stockholders not named Mark Zuckerberg were in favor of a proposal to strip the CEO of his power to control the company

Source: Bloomberg Gadfly analysis of Facebook's election disclosures

Notes: Zuckerberg has the power to vote 4.6 billion Facebook shares that are owned by himself and company co-founder Dustin Moscovitz. The analysis excluded from the vote tally shares marked as abstentions or broker non-votes.

Zuckerberg's right to vote 10 of his shares for every one held by ordinary stockholders is the reason he controls Facebook, even though he owns only 14 percent of the total. The CEO's supervoting power was well understood when Facebook went public in 2012. People who bought Facebook shares then and since have essentially agreed to allow Zuckerberg to do whatever he wants even if all other shareholders disagree. Similar supersized stock structures exist to empower founders at Google's parent company, Workday, Snapchat and other companies.

And yet eight in 10 votes from those other than Zuckerberg were cast in favor of a proposal to essentially undo the CEO's special class of stock. The election result won't change anything because Zuckerberg's votes are the only ones that matter. Including his extra-powerful shares, about 20 percent of ballots were cast for the proposal, according to a tally Facebook disclosed late Tuesday.

Still, the rejection by shareholders outside the company is an embarrassing result for Facebook and its board of directors, which has already faced criticism and litigation for going along with Zuckerberg's proposal last year to solidify his majority voting power in perpetuity. 

To be fair, this election was meaningless. Anyone who voted to strip Zuckerberg's supervoting shares had to know the Facebook boss would vote the other way. That made it zero risk to cast a harmless protest vote. Firms that advise stockholders how to vote in corporate elections had recommended investors vote for the proposal by a small Facebook investor. Surely some large stockholders went along with the recommendations of those voting advisers.

Yet it's remarkable for shareholders who have been financially rewarded to engage in such a dramatic protest vote. Facebook's stock price is four times what it was when the company went public in 2012. Net income has soared from $1 billion in the year before Facebook's IPO to more than $10 billion. If there is shareholder discontent now, what happens if and when Facebook's business hits a wall?

Shareholder Rewards

Facebook's stock market value has soared in the five years since its IPO

Source: Bloomberg

Shareholders at most companies don't tend to mind if their companies are controlled by powerful founders. They might even say it's good for a company not to be beholden to the whims of shareholders. Until something goes wrong. And then supervoting shares can turn into a curse. At Viacom, the family that controls the company through a special type of stock was caught up in a messy feud last year that hurt business. Shareholders were powerless to do anything about it. 

At Facebook, shareholder discontent showed up in other ballot measures last week, too. Excluding shares Zuckerberg presumably voted for his own re-election to the board, about 35 percent of total votes cast in his election were marked as "withheld." Those are effectively no votes. That share of withhold votes tends to be considered a sign of disaffection in the shareholder ranks. 1

The election result shows there is unease among shareholders -- and from more than the usual corporate governance scolds. Similar proposals to end Zuckerberg's supervoting power received significant shareholder support at earlier annual elections, too. Again, Zuckerberg's hold on Facebook is not at risk. But if I were in Facebook's boardroom, the vote would spook me to send the troops out on a shareholder goodwill tour because the owners of the company are sending a message of frustration. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Last year Zuckerberg and other directors received far more withhold votes, and a significant number of stockholder votes were cast against proposals to create a second special class of stock controlled by Zuckerberg. Those shares cast in 2016 match the number owned by Eduardo Saverin, the Facebook co-founder who was the model for the sympathetic fictional protagonist in "The Social Network."

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net

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