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Shareholders won’t force Zuckerberg’s hand in Facebook management

Shareholders won’t force Zuckerberg’s hand in Facebook management

If you’re hopeful that Facebook‘s shareholders will rise up and force change in the way the social media company manages itself, or even force change in management, forget about it.

Founder Mark Zuckerberg has assured that won’t happen.

That’s because Zuckerberg owns the majority of the voting rights to the company. Facebook’s Class B shares, controlled by Zuckerberg and a small group of insiders, has about 18 percent of the shares. But their Class B shares have 10 votes per share while the Class A shares that trade have only one vote per share.

The net effect: Zuckerberg and a small group of insiders control almost 70 percent of the voting shares in Facebook. Zuckerberg himself controls nearly 60 percent of the stock.

Surprisingly, it’s not that uncommon: 355 of the companies in the Russell 3000 (11.8 percent) have a dual voting-class structure. In most cases, founders and other insiders control the votes.

News Corp, for example, has all of the voting power in Class B shares controlled by Rupert Murdoch and his family, the Class A shares that trade (NWSA) has no voting rights.

Google has three classes of stock, but it’s the B Shares — controlled by insiders Larry Page, Sergey Brin and Eric Schmidt — that control over 60 percent of the voting shares. Thanks to a 2015 stock split, the publicly traded Class A shares have only one vote per share (GOOGL), the other publicly traded shares, Class C (GOOG), have no voting rights. The B shares — the one that matters — has 10 votes per share.

Dual voting-class shares have been controversial for years. Last year, the Council of Institutional Investors said multiple class listings should be removed from equity indexes.

“We believe all companies that go to the public markets should be one share, one vote,” Deputy Director Amy Borrus told me.

It’s a tough battle to win, but progress is being made. Borrus has had some luck pleading their case with indexers. S&P Dow Jones Indices and the FTSE Russell have said they will exclude some dual-class shares in the future from their indexes, which will limit a potentially large group of investors that would otherwise have to own the stock.

That’s what happened to Snap after founders Evan Spiegel and Bobby Murphy set up three voting classes that gave them control of nearly 80 percent of the company: a Class C share that gave them 10 votes per share, a Class B that gives other insiders one vote, and a Class A class that gave the investing public no votes. S&P/Dow Jones said it would not be included in the S&P indexes.

The main arguments against a dual class structure is that stock ownership traditionally conveys a say in how companies are run. Ownership is more than just participating in a financial upside; it also conveys the right to participate in how a company is governed.

That right, however, can be bargained away. Those in favor of dual class structures — it is typically the founders — say it allows founders/executives to focus on long-term growth, and that any restrictions may discourage founders from taking companies public.

One argument made by proponents of dual class is that it hasn’t made much of a difference. They insist dual class structures do not underperform single class structures over long periods of time. I would welcome more research on this.

But if you look at Google’s stock, it looks like investors do give a small premium to the Class A shares, which have one vote, over the Class C shares, which have no voting rights. The Class A shares usually trade at a small premium, indicating there is some juice associated with voting rights.

Borrus believes it’s a fight worth pursuing: “When they have this much control, it’s hard to hold them [the founders] accountable.”

She is planning to go to the stock exchanges and ask them to bar dual listings, or at the very least require them to change the rules to insert a sunset provision that will allow dual share listings to revert to one vote, one share some time in the future.

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