Facebook has asked the government for permission to sell shares to the public and there is a surprise in the offering prospectus for democracy worshipers; Mark Zuckerberg controls the board and 58% of the votes even though he owns only 28% of the shares. As early shareholders with high voting rights liquidate, the sale will trigger a loss of 90% of the rights, increasing Zuckerberg’s control of Facebook. The valuation of the company is 100 times earnings, a very high multiple, indicating that dictatorial governance does not force a discount of the offering price relative to a democratically governed company. On the contrary, a dictatorship might command a premium price.
Zuckerberg is mimicking other prominent company dictators in Silicon Valley such as Apple, according to the Wall Street Journal.
At Apple, Steve Jobs has long called the shots in the boardroom, said people familiar with the matter. When Apple was struggling in 1997, Mr. Jobs, who had been ousted from the company years earlier, agreed to return only if most of the board resigned, said Edgar Woolard, a retired CEO of DuPont Co. and one of two Apple directors whom Mr. Jobs asked to stay on at the time. Mr. Woolard, who left the Apple board in 2000, said Mr. Jobs blamed the old board for letting “everything go to hell.”
Since then, Mr. Jobs has kept tight control and directors have rarely challenged him, said people familiar with the board.
Google is similarly governed, as VentureBeat reported in 2010:
Google revealed a plan today for co-founder Larry Page and Sergey Brin to sell off some of their company stock, with the end result that the pair’s voting power will drop below 50 percent.
The news was revealed in a regulatory filing disclosing a plan that Page and Brin made last November to sell off about 5 million shares each. It’s described “as part of their respective long-term strategies for individual asset diversification and liquidity.” The sale, which will take place over five years, will decrease their voting power from 59 percent to 48 percent.
So Page and Brin are still going to carry a lot of weight, to say the least, but for the first time it will be possible for the other shareholders to band together and outvote them.
Another Silicon Valley giant, Hewlett-Packard, once governed as a dictatorship by the founders, has degenerated into a democracy and when management and the board proposed to buy Compaq in 2001, Walter Hewlett and the Packard Foundation waged an unsuccessful proxy war. Hewitt sold his shares after the defeat, fortunately, as the stock price remains lower than prior to the merger 11 years ago and the company has considered exiting the personal computer industry. Another large democratically governed company in Silicon Valley, Intel, has also suffered a stagnant stock price for 10 years while the dictatorships at Google, Apple, and Facebook have skyrocketed.
Bill Gates owned 49% of Microsoft when it went public and Berkshire-Hathaway is governed by a dual-class share structure that makes Warren Buffett, one of the most successful investors in the world during the last 50 years, the company dictator.
Technology companies must make fast decisions despite imperfect information and CEOs cannot waste time holding the hands of board members. Democratically governed companies make decisions very slowly, and even if they could become more decisive, conventional wisdom is often unwise. Most people assume that CEOs issues orders and the employees act like soldiers and obey, but, in reality, middle managers often resist so that they can preserve bureaucratic power. In desperation, CEOs squander scarce company cash to build political consensus using expensive consultants such as McKinsey, staffed with recent college graduates unfamiliar with business. The consultant interviews are a kabuki dance where the consultant tries, without explicitly asking, to guess what the CEO wants him to recommend.
India, another country strong in software technology, is watching and I hope they repeal the law prohibiting the sale of shares with inferior voting rights. Investors are not children and should be free to choose what they believe will return the highest profits.