"Why does Mr Zuckerberg need the entrenchment factor of a dual-class structure? Is it because he does not want governance to evolve with the rest of his company? If so, this American dream is now akin to a dictatorship," wrote Aeisha Mastagni, a portfolio manager with the California State Teachers' Retirement System. "It is time to end the dual-class." CalSTRS manages the country's second-largest pension fund, and owned $825 million of Facebook's stock as of March 30.
According to its most recent proxy filing, Zuckerberg owns or controls voting for 89 percent of Facebook's B shares and less than one percent of its common shares, giving him voting power over 60 percent of the stock. That means he could, in effect, stop or control the outcome of board elections or shareholder resolutions -- including a proposal investors will vote on at its annual May 31 meeting, which calls for Facebook to recapitalize its stock so that each share has only one vote. A similar proposal has been rejected at Facebook's last four annual meetings.
The op-ed comes amid broader investor concern over multi-class share structures. Some stock market index providers are even trying to restrict dual-class companies with unequal voting rights from their indices, moves that could affect liquidity and investor demand. Last August, for example, S&P Dow Jones Indices said it would no longer add new companies to the Standard & Poor's 500-stock index with more than one class of shares -- current constituents, like Facebook, would be grandfathered in -- while FTSE Russell and MSCI have made other moves to restrict multi-class companies from their indices.
Mastagni's op-ed follows other sharp critiques of Facebook's governance from big pension funds in recent months as the social media giant has navigated the fallout of its Cambridge Analytica crisis. In March, New York City comptroller Scott Stringer, custodian of the city's $193 billion pension fund, which holds $895 million in Facebook stock, called for Facebook to add three new independent directors and replace Zuckerberg with an independent chairman, urging the board to "take the steps necessary to restore investor confidence in the board and its ability to provide independent and effective oversight."
In April, the state treasurer of Illinois, Michael Frerichs, who is supporting Stringer's effort, said "in essence Mr. Zuckerberg is not accountable to anyone. Not the board, nor the shareholders," reported the Financial Times. "Right now, Mr. Zuckerberg is his own boss and it’s clearly not working." CalSTRS's chief investment officer, Christopher Ailman, also said in a tweet that he was deleting his Facebook account: "Their lack of oversight and poor management is offensive."
Nell Minow, vice chair of the governance consulting firm ValueEdge Advisers, said it is not unusual to see several institutional investors slam a company's practices -- especially if there's a major governance question at stake.
"Dual-class share structures are basically the company telling you they want access to the capital of a public company but the control of a private company," she said. "It's a win-win for insiders, but a lose-lose for investors."
In response to Mastagni's letter, a Facebook spokeswoman pointed to the following statement in the company's proxy: "Our board of directors believes that our capital structure contributes to our stability and insulates our board of directors and management from short-term pressures, which allows them to focus on our mission and long-term success."
Zuckerberg, who tried to preserve his voting power last year as he gave away shares for charitable purposes -- before backing down amid a shareholder lawsuit -- said in an interview with Vox in April that he felt "really lucky" to have that kind of governance structure and that it "reflects more what people in the community want than what short-term-oriented shareholders might want."
The Council of Institutional Investors, which represents pension funds and other big investors like endowments or foundations, wants multi-class companies with differential voting rights to “sunset” to a “one share, one vote” structure within seven years of IPO. CII plans to propose to major U.S. stock exchanges that they require future multi-class companies to agree to sunsets of no more than seven years as a condition of listing. It points to research, by the European Corporate Governance Institute, also referenced in Mastagni's letter, that initial higher stock price premiums for multi-class companies tend to dissipate after several years.
According to ISS Analytics, the data intelligence arm of Institutional Shareholder Services, 9.2 percent of companies in the Russell 3000 index have dual-class share structures, up from 7.7 percent in 2012, the year Facebook went public.
Minow said if she were to advise Facebook, she would suggest it adopt a sunset provision and allow minority investors to add directors to the board.
"I would say listen to your investors," she said. "You don’t need to give up everything you have right now, but you need to allow some options."