Facebook shareholders say Mark Zuckerberg holds too much power

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The scandal around Facebook’s privacy practices and the way that it protects its users information – at present nether official investigation for possibly violating US federal securities laws – brings into question the way that the company is run. In item, the fact that its founder, Mark Zuckerberg, owns approximately 16% of Facebook but commands 60% of its voting power via a special type of shares.

Facebook is not alone in this respect. There appears to be a trend among newly-listed, by and large high-growth, firms to have these corporate governance structures that provide shareholders with weak rights when it comes to running the company. The dual class share structure, as in Facebook’southward case, is but one of several measures to ensure that the founding member team remains in power.

Likewise as Facebook, companies that have established these sorts of governance mechanisms include Berkshire Hathaway, Expedia, FitBit, Ford, Google (Alphabet), GoPro, Hyatt Hotels, Snap, and Under Armour. The main defence of this governance measure, used by the founders or family unit heirs of these firms, is that information technology allows the companies to take a long-term view and brand investment decisions that may not necessarily yield results in the curt run.

But the recent Facebook scandal also highlights that these corporate governance mechanisms announced to brand firms immune to calls for change, particularly if the leadership of the firm is afflicted.

Proficient vs bad governance

Shareholders are the main providers of capital for publicly listed companies. In render, they receive a multifariousness of rights, such as voting at the annual general meeting and electing the directors who sit on the lath.

Academic findings propose that firms in which shareholders take many opportunities to raise their vocalism tend to perform better than firms with weak shareholder rights. Hence, firms with strong shareholder rights are oft considered “good” corporate governance firms. Firms with weak shareholder rights are typically referred to as “bad” corporate governance firms.

Facebook might benefit from giving shareholders more say.

focal point / Shutterstock.com

This is, however, a very simplified mode of describing things. There is no blueprint for good corporate governance as every business firm is likely to accept unlike needs, and these as well change over the life cycle of the firm.

Yet, in that location is niggling a controversy nearly the fact that when in that location is little opportunity for existing shareholders or outside activist investors to influence things, managers and directors tin become entrenched and make decisions that could damage the business organisation – and therefore shareholders. And companies where the board of directors tin make decisions without fright of being replaced have been labelled “dictatorship firms”.

Pros and cons of dictatorship

As it turns out, under certain conditions, dictatorship firms may actually perform well. Recent research suggests that in order to foster innovation, reward for long-term success and chore security are of import. The way that dictatorship firms are ready facilitates this.

Information also suggests that dictatorship firms tin increase company value by allowing it to take a long-term view. Hence, shareholders provide capital to dictatorship firms by trusting the skills and vision of the founder and leadership squad to identify, invest in, and manage projects that guarantee continual high time to come growth.

But dictatorship-mode corporate governance can become problematic in three scenarios. First, when growth and innovation slow downward. This contradicts 1 of the primary arguments in favour of dictatorship firms – that their long-term focus fosters innovation and that this is associated with high growth. But when growth does slow downwards, the firm will have fewer investment opportunities.

Plus, lower spending tends to mean higher future greenbacks holdings and academic evidence suggests that every bit companies accumulate more cash, they tend to make worse investment decisions. Hence, in those firms, information technology becomes more of import to monitor how majuscule is spent and to consider paying out more to shareholders.

A second problematic situation for dictatorship firms is how to handle succession – something Elon Musk, the founder of Tesla and SpaceX, has spoken of. As Musk puts it: the dual class structure can exist taken to an extreme “where one class basically doesn’t count”. That’s the public shareholders. And, although possible, it is rare that the children of the founders are the correct people to keep running the firm (which is a common line of succession in a dictatorship firm). Hence, there needs to be a path towards a single share class and so that control is non passed on via dictatorship.

The third problematic scenario for dictatorship firms is when a dramatic modify in the grade of activeness of the company is required – particularly in response to scandals. Since 2010, Facebook has had 10 sets of legal problems (excluding the Cambridge Analytica scandal). In a company with stiff shareholder rights, it is probable that a change in the executive leadership team would have happened by at present.

Not all hope for better corporate governance is lost, notwithstanding. The ride-hailing app company Uber provides an example of how modify tin still happen, despite having an entrenched leadership team. After several scandals emerged at the cease of 2017, its board made quondam Uber CEO Travis Kalanick step down and revoked his super-voting rights, creating equal voting power among shareholders. Facebook is yet to make similar moves but it would create a more democratic governance structure if information technology did so.

Source: https://theconversation.com/does-mark-zuckerberg-have-too-much-power-at-the-helm-of-facebook-94003