Facebook: Investors Will Now Pay The Price Of Allowing Poor Governance.

Facebook: Investors Will Now Pay The Price Of Allowing Poor Governance.

The move to oust Mark Zuckerberg will almost certainly fail in the strongest signal yet that companies with uneven share voting structures should attract a discount to their valuation. An attempt is being made to remove Mark Zuckerberg as chairman that is almost certain to fail because unless Zuckerberg votes for the motion himself, it will fail. This is because of the dual voting structure where the A shoulders hold 82% of the economic interest in the company but only 32% of the voting power. Mark Zuckerberg owns over 75% of the B shares meaning that he alone controls at least 51% of all votes cast. I have said many times that while things are going well and the shares are going up, no one cares but when things begin to go wrong, they will go wrong for longer than if management can be removed by minority shareholders (see here, here, and here). This is exactly what is going on with Facebook and the current crisis that it now faces. The result is that problems tend to be far worse and last much longer than they otherwise would if the shareholders had the power to enact change. Companies like Google, Facebook and Baidu get the full 30% discount. If the company is still attractive after that discount, then RFM is happy to own it knowing that investors are being properly compensated for being unfairly treated. With margins to fall another 500bp this year, weak AI and a general slowdown, Facebook is not close to being attractive even before the 30% discount has been applied.

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BELCHATOW, POLAND – APRIL 10, 2014: Closeup photo of Facebook icon on mobile phone screen. Popular social network.

The move to oust Mark Zuckerberg will almost certainly fail in the strongest signal yet that companies with uneven share voting structures should attract a discount to their valuation.

An attempt is being made to remove Mark Zuckerberg as chairman that is almost certain to fail because unless Zuckerberg votes for the motion himself, it will fail. This is because of the dual voting structure where the A shoulders hold 82% of the economic interest in the company but only 32% of the voting power. The B shares which make up 18% of the economic interest in the company control 68% of the vote.

Mark Zuckerberg owns over 75% of the B shares meaning that he alone controls at least 51% of all votes cast. Consequently, any motion that he does not like will fail as the majority of shares will be cast against the motion. The reality is that Mark Zuckerberg has complete control over Facebook, the election of its directors, the makeup of its board, its strategic direction and any major M&A…

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