Facebook’s stock structure gives Mark Zuckerberg a blank check — investors were OK with that, but the world can’t afford to be (FB)

Mark Zuckerberg

Facebook is under scrutiny for how it handled its knowledge that Cambridge Analytica illicitly collected data on 50 million of its users.
In the wake of the news, Facebook's stock plunged 7% amid worries that it was practically inviting Congress to step in and regulate its network.
This scandal, along with the news that Russian-linked groups exploited Facebook's network to try to influence the 2016 election, might have other CEOs worried about their jobs.
But there's little chance Zuckerberg can be held to account by shareholders or the general public, because Facebook's dual-class stock structure gives him singular control over the company.

If Mark Zuckerberg were a normal CEO, he might — emphasis on might — be fearing for his job right now.

At a typical company, a scandal the likes of the one involving Cambridge Analytica's illegitimate harvesting and possession of data on 50 million Facebook users might have directors asking some uncomfortable questions of the executive team. Those questions might be particularly pointed if that same company and executive team had already been at the center of a separate but related scandal regarding the 2016 election.

And a CEO who just saw $30 billion of his company's market valuation get evaporated in one day as a result of the most recent scandal might be rushing to get out in front of the news to try to protect his company if not his position.

But Facebook's not a typical company and Zuckerberg is not a normal CEO. No matter how bad the Cambridge Analytica scandal gets Zuckerberg is almost certainly staying put. That's because when it comes to whether Zuckerberg stays or goes, he himself has the final say. There's no way to appeal to the company's board, because for all intents and purposes, the board works for him.

Zuckerberg's power comes from Facebook's stock structure

Zuckerberg's unassailable position is due to the way Facebook's ownership is structured. Like several other tech companies, including Google and Snap, the social networking giant has more than one class of stock. Although all shares represent an equal stake in the company, one set — Facebook's Class B stock — has 10 times more voting power than the other.

Evan Spiegel Thanks in large part to his ownership of more than 75% of Facebook's Class B shares, Zuckerberg has more than half of the voting power at Facebook. That essentially gives him control over the company. He can vote directors in and out, vote down shareholder proposals urging reforms, veto merger proposals, and quash any effort to topple him — all by himself.

That structure was designed to protect Zuckerberg and his executive team from the often short-terms concerns of everyday shareholders so he could concentrate on building Facebook's business for the long term. That's a nice weapon to repulse unwanted meddling from malicious Wall Street forces that don't have the company's best interest at heart. But as the world is discovering now, when a company acquires the level of power that Facebook has, the implications of a dual-class stock structure stretch far beyond the firm's financial stakeholders.

If Zuckerberg doesn't want to be bothered with something, you really can't force him to care.

Dual-class stock structures can be beneficial — and controversial

Supporters of such structures can point to real-world situations where they've proven important, perhaps even crucial. Ford's dual-class stock arguably helped it survive the Great Recession without going into bankruptcy, unlike General Motors and Chrysler. The New York Times' dual-class structure arguably allowed it to better weather the downturn that's decimated other newspaper companies over the last two decades by allowing it to more easily invest in its online and other digital initiatives.

Still, the practice of giving certain insiders outsized control over a company has long been controversial, precisely because it limits the control everyday shareholders can exercise over a company. Dual-class structures also allow the empowered insiders to run the companies for their benefit rather than that of shareholders or the general public.

Zuckerberg's singular control over Facebook has already drawn criticism. Two years ago, he tried to force through a proposal that would have allowed him to maintain his control over the company even as he sold his shares. He eventually backed away from that proposal, but only after a lawsuit and stiff resistance from other shareholders.

Christopher Wylie But now Zuckerberg and his company are under scrutiny for something that's important to a lot more people than just how he treats other shareholders — namely, how it handles and safeguards the data of its billions of users.

According to Facebook and published reports, Cambridge Analytica, the data firm that worked with Donald Trump's campaign to target voters, used a Facebook app to illegitimately glean data from some 50 million users of the social network without the knowledge of the vast majority of those users.

Facebook was aware more than two years ago that Cambridge Analytica got its hands on the data, but basically did nothing about it other than asking it to delete the data. It neither followed up to ensure that Cambridge Analytica actually did delete the data nor, apparently, did it warn users that the data firm had gotten access to their data. And it didn't even publicly acknowledge the data leak until late Friday and apparently only did it then because The Times and the Observer were about to publish reports about it.

Zuckerberg is acting like he did with reports of fake news

Since the leak, Zuckerberg has been nowhere to be seen. His absence from the scene and refusal to accept responsibility for what's happened are reminiscent of his initial response to reports that Russian-linked groups had exploited Facebook's network to spread fake news and propaganda in an effort to influence the 2016 US presidential election. Zuckerberg infamously dismissed such concerns.

Facebook's investors were obviously a bit more concerned than Zuckerberg seems to be showing publicly. Amid worries that regulators are going to step in because Facebook is doing such a poor job of overseeing its network, they sent the company's stock spiraling downward. It ended the day off 7%.

Zuckerberg is obviously very smart. He's also done a great job of growing Facebook into the behemoth it is today.

But when you give someone nearly unassailable, king-like powers, what you really want the person to be is wise and mindful of how his or her actions might affect others. Zuckerberg is showing he is neither.

Zuckerberg is smart, but not wise

To the contrary, Zuckerberg seems to have blinders on when it comes to the power Facebook now holds and the responsibility that comes with that power.

mark warner The company holds vast amounts of data about its users. The large majority of its users probably have no idea how much data Facebook holds or how that data could be used to manipulate them. Indeed, for the few who likely ever try to take the time to do it, trying to figure out which Facebook-linked apps or services have access to which parts of your personal data on Facebook can be an exercise in frustration.

Yet the company has shown that it wants to collect ever more data on its users and generally do with it as it sees fit. And it obviously felt little compulsion to govern how that data was used by the partners who it gave access to that data.

Likewise, the company's social network is incredibly powerful both in its ability to disseminate messages — and to control what messages get seen. But Facebook has shown little concern with how the Russian-linked groups abused that power.

Facebook has more than 2 billion users, an unprecedented level of power and influence for a single company. It's so large that its actions and policies have repercussions for the entire world, even those who are not on Facebook.

And remember, when we say Facebook here, we mean Zuckerberg. Because thanks to the power he holds over the company, Facebook is Zuckerberg and Zuckerberg is Facebook.

To hold Facebook accountable, you've got to hold Zuckerberg to account. But Facebook's dual-class stock is intentionally designed to prevent just that from happening.

Investors might have been OK with that. But society doesn't need to be.

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