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Facebook Wants Your Money, Not Your Interference

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Probably not since Google’s IPO, with its similarly disappointing showing in corporate governance, has there been so much interest generated in an internet IPO as that of Facebook.

But, although it is hoped to raise an enormous amount of investment, Facebook’s attitude towards governance is far more slapdash than

anything demonstrated by Google.

But governance matters.

There are similar issues with dual classes of share, A – one vote, B – 10 votes. Facebook is also a controlled company, with founder Mark

Zuckerberg holding (pre-IPO) almost 57 percent of the voting power of the stock through ownership and voting power over other shareholders’ stock via what is known as an irrevocable proxy. You all know what irrevocable means. So that really means that elections and any issues at the annual meeting are his to decide.

So this is what GMI wrote about Google:

Regarding takeover defenses, the company has a dual voting structure where each share of Class A common stock is entitled to one vote and

each share of Class B common stock is entitled to 10 votes. As a result, Mr. Schmidt, Page, and Brin beneficially own more than 67% of the company’s voting power. This raises concerns that the interests of public shareholders may be subordinated to those of the Chairman and co-founders.

Substitute a few names and we’ll be writing this about Facebook too.

But Google has an independent board, just, with six outside directors, three insiders (the founders) and one investor director; what we call at GMI an outside-related director. Facebook doesn’t even manage that.

The board consists of Marc L. Andreessen, Erskine B. Bowles, James W. Breyer, Donald E. Graham, Reed Hastings, Peter A. Thiel.  And of course, Mr. Zuckerberg. Messrs. Andreessen, Graham, and Hastings were elected as designees of Mr. Zuckerberg. Messrs Breyer and Thiel were elected by stockholders of, respectively, the holders of a majority of the shares of Series B preferred stock and Series A preferred stock. They are investor directors. Not necessarily a bad thing to have on a board at this stage of a company’s development. Of course, Messrs. Breyer and Thiel have also entered into irrevocable proxy agreements with Mr. Zuckerberg, so it is unlikely that they will act independently of the CEO and chairman even should they wish to.

But that’s not all. Two other directors, Messrs. Graham and Hastings also have relationships with the company that go beyond the boardroom.

This is what the S-1 registration document says:

During 2009, 2010, and 2011, Netflix purchased $1.9 million, $1.6 million, and $3.8 million, respectively, of advertisements on our website. Mr. Hastings, a member of our board of directors, is the Chief Executive Officer of Netflix.

And isn’t Netflix being sued…? So a reputational risk there, also.

And Mr. Graham has not one, not two, but three relationships beyond the boardroom. Again from the S-1:

During 2009, 2010, and 2011, The Washington Post Company and its related companies purchased $0.6 million, $4.8 million, and $4.2 million, respectively, of advertisements on our website. Mr. Graham, a member of ourboard of directors, is the Chief Executive Officer of The Washington Post Company. In addition, The Washington Post Company is affiliated with an advertising agency, Social Code LLC, that has advertising clients that do business with us.

Molly Graham, the daughter of Donald E. Graham, a member of our board of directors, is employed by us. During 2009, 2010, and 2011, Ms. Graham had total cash compensation, including base salary, bonus and other compensation, of $98,058, $133,620, and $189,168.

AND DONALD GRAHAM IS DESIGNATED THE LEAD INDEPENDENT DIRECTOR?

So that leaves Marc L. Andreessen and Erskine B. Bowles who of course were nominated by Mr. Zuckerberg.

All in all, not the most independent board we’ve ever seen at GMI, just independent under NASDAQ listing rules, the exchange Facebook has

elected to be listed on.

Not only that, but since the company is a controlled company, it doesn’t actually have to have an independent board, or a nominating or a compensation committee. The fact that it has any of these things – which is doubtful – is a sop thrown to shareholders. In fact, its nominating committee consists of the entire board, with the chairman being… Mr. Zuckerberg.

That all adds up to “we want your money, not your interference.”