Home tech Facebook crumbles around its lone king

Facebook crumbles around its lone king

Mark Zuckerberg seems increasingly alone at the top of Facebook Inc., with executives churning out the doors as he promises a new direction that seems antithetical to everything he has said about the company's plans for years.

He can, of course, do what he wants, because the company is really a Mark Zuckerberg production, and because he has always had what the founders of Silicon Valley crave: the control of his company's founder. While other executives leave, Facebook seems to go beyond the total rule of Zuckerberg.


FB, + 0.39%

has suffered seemingly endless controversies, including the most recent, hosting a live stream of mass shootings in two mosques in New Zealand. Facebook was notified by the Christchurch police to remove the video, which was not found by any of Facebook's artificial intelligence engines or humans searching for violent content, contrary to Zuckerberg's explanation to Congress a year ago about how his systems are improving in the search for malicious content. Facebook stated in a blog post that in the first 24 hours of filming it removed about 1.5 million videos of the attack globally, with over 1.2 million videos blocked during upload.

The massacres took place two days after a massive interruption and a day after a senior executive left, judging by the unhappiness signaled by Zuckerberg's new direction, outlined in a manifesto that was long in words despite being little detailed. It seems that Zuckerberg has dug himself into a trench, where he is following his inner instincts and intuition for the company he started with his roommates at Harvard 15 years ago. Needham & Co. analyst Laura Martin, citing recent events plus a looming regulatory threat, said the combined risks are creating a negative network effect for Facebook.

Investors who may be dissatisfied with the constant chaos know that their hands are tied even if they do not agree on how Zuckerberg reigns over his kingdom. Zuckerberg still controls about 60% of Facebook's votes. The departure of a key lieutenant – the long-time head of product Chris Cox – on top of the loss of the founders of Instagram and WhatsApp, indicates a growing internal turbulence, with a CEO more at the top.

Learn more about Silicon Valley's poor corporate governance through the embrace of founder control

"There have been some important high-level departures that have raised many concerns," said Jonas Kron, who leads shareholder defense efforts at Trillium Asset Management, an employee-owned investment management firm based in Boston. "Then it ends with New Zealand, and a 12-hour break is a bit difficult to maintain."

Last October, Trillium presented a shareholder proposal with the support of several state treasurers, representing about 5 million shares, asking the Facebook board to appoint an independent president.

"There is a lot to do, and the company would benefit greatly from having Mark Zuckerberg focused on management and execution, and have an independent president who focuses on the board of directors and relations with the investors and board supervision, "he said.

During the numerous crises that the company suffered after the 2016 US elections, Zuckerberg appeared to listen to no one but perhaps the Chief Operating Officer Sheryl Sandberg. The New York Times reported at the end of last year that Zuckerberg and Sandberg ignored the repeated warning signs of some of the many problems that plagued Facebook.

There have been anecdotal reports of some Facebook employees looking for new jobs or not feeling comfortable giving dissenting opinions between Zuckerberg's strict control. In January, CNBC reported on the sectarian culture of the company and how some employees' fear of giving honest feedback may have contributed to the scandals that have enveloped the company.

Two weeks ago, Zuckerberg surprised investors and users with a commitment of over 3,000 words to improve privacy by admitting, in the effectiveness of the year, that Facebook "does not have a solid reputation for privacy." Facebook now plans to work on a single encrypted-messaging platform, a move that Cox obviously didn't agree with his resignation.

Cox was not the only key manager to start in recent months. Last fall, the co-founders of WhatsApp and Instagram left the disagreements on the directions in which Zuckerberg wanted to take their platforms, some years after their acquisitions by Facebook. Initially he had promised to leave the companies alone, managing them as subsidiaries. In Martin's note, in which Needham's analyst also downgraded the stock into a suspension, he highlighted 11 senior executive departures in recent months.

"A negative network effect suggests that departures will continue, and since we believe that people are a key competitive advantage of FAANG companies, this implies an acceleration of the destruction of value until the end of the turnover of senior executives", Martin wrote. & # 39; We prefer to move aside until we see the turnover of senior employees stabilize. "

The pressure to produce steady revenue growth and generate revenue for other properties, Instagram and WhatsApp, even if the growth of users on Facebook has decreased, has led Zuckerberg to make severe decisions. Those decisions could only lead to more controversy, however.

After his privacy manifesto, which spoke of the encryption of all messages, many feared that Facebook would be used more and more for evil means and that the company would not be able to control abuses on its network or help the forces of the # 39; order. Roger McNamee, one of Facebook's first investors and co-founder of Elevation Partners, believes that even with message encryption, the company's business model remains intact. Messaging is "a small part of the data and metadata that matter," for the Facebook business model, he said, because it can continue to gather information about its users for targeted advertising through newsfeeds and history activities.

"The manifesto leaves FB's business model unchanged. It is not acceptable," McNamee said in an email. "The business model amplifies the theories of incitement to hatred, misinformation and conspiracy, with increasingly serious consequences, such as terrorism in New Zealand."

Read the new book by McNamee, which talks about the problems of Facebook and its solutions

Whether Zuckerberg's decisions and instincts are correct or not, Facebook investors must trust him. Since he still has control of the votes, the company's board of directors and its investors only need to agree or vote with their feet, since technically they have no say in the matter. One day, Zuckerberg could become a poster for the concept of phasing out the control of the founder and the double-class shares, a proposal that some officials of the Securities and Exchange Commission support, which would put some sort of time limit for the founder controlling a company.

Jonas of Trillium believes that it is an imperfect solution.

"The best approach is not to have double class at all," he said. "A sharing, a vote."

But while more investors speak out against controlling stocks and dual-class founders in public companies, the concept is becoming even more popular when a new wave of major IPOs begins to hit US markets. The app developer of Ride-hailing, Lyft's prospectus revealed that he is about to become public with two-class shares, with his two founders, Logan Green and John Zimmer, who should be in control. This happens to the well documented problems of Uber Technology Inc. with its controlling co-founder, Travis Kalanick. To D.A. This week Davidson's analyst wrote in a note that Lyft gained riders after the wave of Uber scandals, ranging from a culture of widespread sexual harassment to software used to deceive regulators, which eventually led to the expulsion of Kalanick.

At the next annual Facebook meeting, which will probably be held in May, shareholders will have the opportunity to express their disappointment with some of Zuckerberg's recent decisions and his reign in general. But with Zuckerberg's control and the votes imposed on them, why should they worry?

"The goal is to offer investors the opportunity to express an opinion as to whether an independent chair is a good idea or not and to provide the board with that information," Jonas said. "If the majority of external shareholders agree, even if it is only 40%, it is an opinion that I think everyone should be taken seriously."

Investors must remember that in companies controlled by the founders, when the going gets tough, they don't have much say in the matter. They can try to send messages to management and to the board of directors, through things like shareholder resolutions, but the controlling founder / shareholder always has the last word.

Do you want this kind of analysis sent to your inbox? Sign up for MarketWatch's free MarketWatch First Takes newsletter. Sign up here.


Must Read

Book tribute to Anthony Bourdain to be released in May

The book's publisher's website says it "brings together memories and anecdotes from fans reminiscent of Bourdain's unique achievements and lasting influence on their...

News from Meghan Markle: Pippa Middleton gives some advice from BABY before the birth of Meghan Royal | news

Pippa first opened her son Arthur since he was born on 15 October last year. Kate, the sister of the Duchess of Cambridge, is...

Easter egg hunts, basket giveaways draw hundreds of kids on South Side

A silence fell over Washington Park, other than the Dozen Seagulls squawking overhead, as the anticipation mounted and the countdown began. "Three, two, one, go!" With...

The Russo brothers are developing a Stan Lee documentary

It is still that Stan Lee is not with us anymore. I really hoped he would see Avenger: Endgame and the completion of a...