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Mark Zuckerberg shows why giving company founders total control can be disastrous

Mark Zuckerberg shows why giving company founders total control can be disastrous
Too much power? Facebook CEO Mark Zuckerberg at a 2017 meeting with entrepreneurs. (Jeff Roberson / AP)

Back at the time of Facebook's initial public offering in 2012, I advised its new stockholders:

"Congratulations. You're now married to Mark Zuckerberg." Since he would be one of the most deeply entrenched chief executives in American business thanks to a two-class stock structure that guaranteed him voting control over the company, I wrote, "You better hope he does everything right, because if he doesn't, he'll be harder to get rid of than tuberculosis."

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What Facebook holders may be witnessing just now is the first cough heralding the onset of the malady our forebears called "consumption."

We have a responsibility to protect your data, and if we can’t then we don’t deserve to serve you.


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Zuckerberg, along with Facebook's media-star chief operating officer, Sheryl Sandberg, have been dodging brickbats for their feeble response to reports that the private information of 50 million Facebook users was misappropriated by the firm Cambridge Analytica. Cambridge then allegedly used some of the data in an attempt to manipulate the U.S. presidential election and other votes.

Zuckerberg remained silent for days before issuing a statement asserting that he has "been working to understand exactly what happened and how to make sure this doesn't happen again." He also told users, "We have a responsibility to protect your data, and if we can't then we don't deserve to serve you."

The statement drew widespread horselaughs at the notion that the hands-on Mark Zuckerberg is flummoxed by the misuse of data generated by his own company, provoking demands from leading members of Congress that he come to Washington and testify about the scandal, under oath.

After initially resisting, Zuckerberg reportedly has decided to testify at least to the House Energy and Commerce Committee, although negotiations over when he will appear and other terms of his testimony were still taking place. He also has been asked to appear before the Senate Judiciary Committee. Zuckerberg has declined a request to testify before the British parliament.

Meanwhile, official investigations are proliferating, including one announced Monday by the Federal Trade Commission.

The FTC acknowledgment of its investigation noted pointedly that Facebook had entered into a consent decree in 2011, promising to tighten up its consistently misleading privacy policies and specifically protect its users from misuse of their data via third-party apps—such as the one that Cambridge Analytica reportedly used to snarf up user data.

But what may have escaped many observers is that Zuckerberg's response to the latest scandal comes directly out of the Facebook playbook. Zuckerberg's practice all along has been to push the limits of privacy expectations, often by failing to notify users that information they had been led to believe was private had been opened to public view.

When the abuse was exposed, Zuckerberg or Sandberg would issue a mea culpa, explaining that they had made a "mistake," or a "big mistake," or had "messed things up," or had "moved too fast." A compendium of these wan excuses through 2014, when it was learned that Facebook had conducted a psychological experiment on some 700,000 unwitting users, can be found here.

Facebook has been so successful since its IPO that shareholders and the public may have been inclined to forgive these earlier, er, "messes." After all, the shares had risen more than five-fold between the May 2012 IPO and Feb. 1, and Facebook seemed to be a secure component of the "FAANG" stocks powering the stock market higher (the others are Amazon, Apple, Netflix and Alphabet, known traditionally as Google). But that era may have passed; Facebook shares have fallen by roughly 20% since Feb. 1.

It seems likely that one reason for Facebook's serial violation of privacy norms — and conceivably its FTC consent decree — is Zuckerberg's secure position as the company's boss. That position derives from his ownership of 77% of the company's class B shares, which carry 10 votes each, swamping the voting power of the company's 2.4 billion class A shares, of which Zuckerberg owns a negligible amount. Put together, Zuckerberg owns barely 16% of the company, but controls nearly 60% of the votes.

The arrogance this instills in the 33-year-old founder is palpable. It certainly helps to account for Zuckerberg's — that is, Facebook's — insensitivity to its users' privacy needs, and to his airy dismissal (thus far) of calls for his testimony. (He told Wired in an interview that he would prefer that underlings provide Congress with the testimony sought — "So as long as it's a substantive testimony where what folks are trying to get is as much content as possible, I'm not sure when I'll be the right person," he said.)

The question is how Zuckerberg would behave if he held not only minority ownership of Facebook, but a minority of the votes. A CEO who is subject to the directives of a board of directors, not to say vulnerable to being fired, certainly acts differently from one with dictatorial power. Thus far there have been few known checks on his authority. One may have surfaced last year, when he abandoned a plan to add a third class of Facebook shares with no voting rights at all.

Zuckerberg originally claimed that the new class would have enabled him to maintain his voting control while he ceded over a majority of his shares to a charitable venture. He later said that Facebook shares had appreciated so much that he could fund the charity without giving up control. In truth, investors reacted so negatively to the idea of nonvoting shares that he may have had no choice.

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The fortunes of companies with multiple stock classes suggest that cementing founders in place isn't normally a great idea. Zuckerberg certainly has made Facebook a success, but his latest misstep may well have placed his previous achievements in jeopardy.

Then there are cases like the game company Zynga, which went public around the same time as Facebook with a stock structure that gave founder Mark Pincus and his insider pals 98.2% of the company's voting power. Zynga peaked shortly after its IPO at $14.69, and currently is trading below $4. Snap Inc., the creator of the Snapchat app, gave its 20-something co-founders, Evan Spiegel and Bobby Murphy, nearly 89% voting control. Snap closed at $24.48 the day of its IPO a year ago; it's now trading around $16, amid questions about whether it's got much of a future.

Multiple stock classes traditionally have been frowned on by the stock market. The New York Stock Exchange banned them among its listed stocks in 1940, though it capitulated to the value of money in 1956, when it angled desperately for the IPO of Ford Motor Co., even though the Ford family insisted on maintaining voting control.

More recently, the Big Board has displayed renewed doubts about the practice, with good reason. There can be no assurances that Facebook would be a better corporate citizen if Zuckerberg could be fired by a discontented board. But the chances that Facebook will behave better on its own are nil. That raises the prospect of government action to clip its wings. Investors plainly are showing concern that the value of their investment could be headed south. And the value of Zuckerberg's dominance could go right along with it.

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Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

UPDATES:

10:40 a.m., Mar. 28: This post has been updated to reflect that the FAANG stocks include Amazon.

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