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Facebook is not a democracy. Does that matter to shareholders?

Zuckerberg Russia Facebook is Not a Democracy

68% of shareholders want to replace Mark Zuckerberg as chairman of Facebook Inc (NASDAQ: FB), but Mark Zuckerberg still holds the majority of voting shares (source: Facebook March 2019 Quarterly Report, page 54). As much talk as there is about Facebook’s role IN democracy, this is a reminder that the corporate structure of Facebook IS NOT a democracy, a face many shareholders accept in exchange for the hope that Mr. Zuckerberg’s focused guidance would lead to higher shareholder returns.

Although Facebook shares tend to be included in ESG and other “sustainable investing” funds for environmental and social brand, investors should note that as of June 2019, Sustainalytics gave Facebook a Governance score of only 43/100, in part due to Mark’s singular control of the company. As with other ESG factors, corporate governance is not black and white, and as the CFA institute recently explained in their highly recommended review on “Dual Share Classes: The Good, The Bad and the Ugly“, allowing a visionary founder to retain voting control of a company can sometimes be to shareholders’ benefit. Issues of corporate control and governance are more acute here in Asia, where I routinely run into listed companies with little or no outside voter influence, but are increasingly becoming relevant in US-listed tech companies like Facebook.

As of this writing, neither GFM nor any of our clients’ managed accounts have any position in Facebook shares, and this governance question is just one factor in our decision not to own Facebook for the time being. Just as importantly, we are watching the valuation of FB shares, which in my view are still expensive and optimistic for a company that has arguably reached user and revenue saturation. Part of me believes Facebook can continue to have a bright future, even as a financial institution, though shareholders should continue to keep an eye on how key decisions are made.

Header image source: Government of the Russian Federation

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