Enough ink has already been spilled on how great a company Facebook Inc (NASDAQ:FB) is. Its quarterly results were truly a blowout, which stands in sharp contrast to the disappointments from Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), among several other key blue chips. I have long very much admired Mark Zuckerberg and what he has accomplished in a remarkably short period of time. He continues to show us just how smart he truly is with his most recent moves. As my readers know, nonetheless, I try to take contrarian stances, and feel compelled to write only when I think I have something to say that is somewhat different from what everybody else seems to be saying.
Thus, I am somewhat alarmed that nobody seems to be writing unfavorablyabout the most recent stock split or “stock dividend” proposal Facebook announced in conjunction with its strong quarterly earnings. Again, the results were truly outstanding, and FB even highlighted GAAP (generally accepted accounting principles) earnings, expensing the cost of stock-based compensation in a way many more companies (particularly in the tech sector) should ideally do. All that said, the stock split proposed, which will essentially rob existing shareholders of 2/3 of their voting rights, is an outrage and another step backwards in corporate governance.
Zuckerberg could not possibly have chosen a better time to announce his plans to usurp minority shareholders the majority of their voting rights. Recent press has been deservedly favorable to the young founder of the world’s leading social network. His taking paternity leave, a key benefit FB employees enjoy, his generous philanthropy, and now the blow-out corporate results are but a few recent examples.
At a time when Zuckerberg finally has attained much-deserved widespread recognition for having completed an extraordinarily successful transition from kid-founder to outstanding CEO of one of the best (and now largest) companies in the world. Never a better time to try to substantially dilute the voting rights of minority shareholders. Who could ever do a better job of running the global social network? This is the best possible time to ask investors to give up the majority of their voting rights to ensure that Zuckerberg retains control of FB ad infinitum.
So what is Zuckerberg exactly trying? The proposed 3-for-1 stock split will give shareholders two newly minted “C” class stock shares without any voting rights and one new share of the class A stock that minority investors have owned (worth, of course, as with all such splits, one-third of the value of the pre-split stock). This follows a similar move a couple of years ago by Alphabet (NASDAQ:GOOGL) when it was still called Google.
At least in the case of the latter, the split was only 2-for-1, cutting the voting stake of minority shareholders in half, and not by the just proposed two-thirds by FB. Both companies came public with the poor corporate governance practice of dual-class stock. As I have highlighted in the past, the ability to do so in the US what was prompted Alibaba (NYSE:BABA) to choose to list its stock in the US rather than in Hong Kong, where such dual-class stock listings are not permitted.
Like Google at the time, FB issued to the general investing public class A stock with one vote per share, reserving the “controlling” class B stock (10 votes per share!) for the select few. Now FB is following by creating a class C stock with no vote at all. This, if approved, will compose the majority of Facebook holdings for most shareholders. Everything else being equal, minority shareholders (the investing public at large) will own only a third as many voting rights as they did prior to the stock split. As I wrote about Alphabet, I can understand the rationale behind such a decision by the controlling shareholders. Unfortunately, the increasingly prevalent “short-termism” by market participants can be used by long-term oriented controlling shareholders as a reason to take away voting rights from the market. This in a way is the ultimate “anti-activist” tactic.
As I have written in the past, however, not all shareholder activists are short-term oriented. In any case, the best approach against short-termism cannot possibly be worse corporate governance! While I am not optimistic that the stock split as exactly proposed will not be approved, I felt that I at least should write about it. So this is my plea to Mark Zuckerberg. Go ahead with the stock split, but give us three class A shares worth exactly one-third the economic and voting rights of each one currently held! In other words, if you feel a stock split is necessary, make it a conventional one, and don’t dilute our voting stake!
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