FB Stock: Growing Trend Should Terrify Facebook Inc Shareholders

This Should Keep Facebook Inc Shareholders Up at NightThis Should Keep Facebook Inc Shareholders Up at Night

Facebook Inc (NASDAQ:FB) CEO Mark Zuckerberg made headlines recently when it was discovered that he a) puts tape over his computer’s webcam and microphone jack, and b) approved a new class of non-voting Class C FB stock, enabling Zuckerberg to helm the company unchallenged. Clearly, Zuckerberg likes to have total control of things, including pesky investors.

On June 21, the Facebook CEO posted a picture on his personal Facebook profile celebrating the growth of “Instagram” to 500 million monthly users. That’s no small feat. If you’re not too distracted by the smiling Zuckerberg, you can see in the background of the picture that the webcam and microphone jack on his laptop are taped over. (Source: Mark Zuckerberg’s Facebook Page, June 21, 2016.)

Using a piece of tape to ward off cyber attacks is a popular DIY way to protect yourself from unwanted surveillance. After all, built-in computer cameras can be hacked remotely via malware and your every move could end up being watched…without your knowing.

Is it a good idea to tape over your computer’s webcam? Zuckerberg seems to think so. There are worse people to take computing cues from and doing so could minimize the fallout from a cyber attack.

Zuckerberg’s DIY Approach to Investors

Zuckerberg’s DIY approach to silencing cyber attacks also works when it comes to silencing investors. (Source: “Facebook 2016 Annual Stockholder Meeting,” Facebook Inc, June 20, 2016.)

On June 20, at the company’s annual meeting, shareholders approved a new class of non-voting Class C shares. While it’s all a little confusing, it essentially ends up looking like a three-to-one stock split.

The 5.7 million Class C shares will trade under a new stock symbol and have the same economic rights as Class A shares. What’s the difference? The newly anointed Class C shares are non-voting.

The new structure allows Zuckerberg, who currently has approximately 60% of Facebook’s voting power, to sell his non-voting shares and retain control of the company through his Class A and B shares. And really, with 60% of the company’s voting power, chances were pretty good that the new share structure was going to be approved.

To be fair, Zuckerberg did make a concession that doesn’t really impact him in any meaningful way. He said his Class B shares will automatically convert to Class A shares three years after he dies or one year after he’s fired or resigns.

Truth be told, most investors couldn’t be happier with the new structure. After all, FB stock is up roughly 13% year-to-date and 31% year-over-year. The company has zero debt, $20.0 billion in cash, and 10+ quarters of tremendous growth.

What’s there to complain about?

facebook nasdaq chart

Chart courtesy of www.StockCharts.com

Not everyone is happy about the new arrangement. Some see it as Zuckerberg’s way of giving away 99% of his FB stock to work on his philanthropic efforts while remaining in control of the company…uncontested.

Despite his mission, some have referred to Facebook’s new governance as favoring benevolent dictators. The whole idea of buying shares is the notion that you own a portion of the company in which you have a say.

Typically, one share equals one vote. This means you share equally in the triumphs and the defeats. This voting privilege has helped many private companies adopt or deny initiatives, reject corporate raises, and eject underperforming leaders.

This is not the case with Facebook. Investors have given up having an opinion that matters for the security of having Zuckerberg at the helm of the company. Zuckerberg has traded in future control of the company (because he’s either dead or quit) to rule Facebook uncontested in the present.

Again, this works well when the company is making good decisions and investors are making money, but it isn’t such a stellar idea should the messiah stumble.

On the other hand, some have suggested that when it comes to Facebook, you’re investing in Zuckerberg. If you don’t like where he’s taking the company, then sell your FB stock and hit the road—or keep it and keep quiet, which is what happens by default since your shares don’t come with a voice.

Is Zuckerberg a Benevolent Dictator?

Again, this my-way-or-the-highway approach works well when everyone is happy. As the last bastion of capitalism, what happens on Wall Street would never be allowed to happen on Capitol Hill.

Democracy is funny, especially when money is involved.