Charitable Mistrust

Someday in your kids’ lifetime, one of the most powerful companies in the world will be controlled by the board of a charitable organization. Ironically, it’s another company’s failed attempt to change their corporate structure that brought this fact to my attention. The first try at an IPO by the We company was fun to watch, if you appreciate the small dot on the internet Venn Diagram where capital markets, humor and Schadenfreude meet. Watching that dumpster smolder also provided me with an unexpected “huh?” moment, though. On the public offering-pitch equivalent of 3rd down and 20, We announced some improvements to their planned corporate governance structure, as lovingly chronicled by Matt Levine. Obviously We had been planning a dual-class share structure, because all the cool kids are doing it, and while We couldn't possibly bear to part with their super-voting shares entirely, they (We) did bend a bit and decide to make them less than infinite in duration: The voting power of our high-vote stock will sunset and automatically decrease to one vote per share in the event that Adam becomes permanently incapacitated or dies. What got me scratching my head was: why hasn’t this particular compromise between controlling founders and prospective investors been more common? I mean, I understand if you founded a company and are taking it public, you’d like to maintain voting control over that company for all your days on earth, so nobody can vote you out of a job you can focus on long-term strategy. So I get the desire for keeping some shares with extra voting rights. But theoretically, the common shares ought to sell for more if the extra-voting shares had a scheduled sunset, even one far in the future, as they would be more valuable to investors decades from now, and therefore also at least slightly more valuable today. So it ought to be in everyone’s best interest to set things up this way. After all, who would care about control of their company long after they are dead? Well, Mark Zuckerberg, I guess. It has been well documented that Facebook is one of several big important tech companies with a dual-class share structure, allowing founder Mark Zuckerberg to keep something like 53% of the voting rights of Facebook stock while owning a much smaller percentage of the total shares. Also well publicized is his intention to give away basically all his wealth (presumably including those Facebook shares) to the Chan Zuckerberg Initiative, before and/or at the time of his death. The logical conclusion is that in the far future, Facebook will be ultimately controlled by whoever is running this particular charitable organization1. It’s not unusual for a person to run a charitable organization and also control a major corporation, but usually, the major corporation part comes first (see Rockefeller, Carnegie); in this case, you could apply for a job running a philanthropic institution, and at the bottom of the bulleted list of position responsibilities, find “oh and controlling Facebook”. Ok, so that’s not exactly how it works, at least not right now. If Mr. Zuckerberg were to get hit by a self-driving bus tomorrow, it’s pretty clear who would control Facebook: Priscilla Chan. She and Mark apparently jointly control the foundation which bears their names, and which is slated to receive the vast majority of their stock holdings. Through some combination of controlling the foundation and just inheriting shares, she would control the company. There’s nothing really weird about that. “Guy starts a company, dies, wife gets control of company” is not a unique story. What’s weird is what happens after both Mark and Priscilla pass on: since nearly all their Facebook shares are being transferred to the foundation, the foundation will control Facebook, and so whoever controls the Chan Zuckerberg Initiative will also control Facebook - I mean they probably won’t be the CEO or anything, but they can decide who gets to be CEO, who serves on the FB board, and generally have the final say over anything Facebook-related. Maybe none of this matters, as Facebook gets disrupted by a newer, cooler social network a decade from now anyway. However, given the struggles of the current occupant of the position of “newer, cooler-than-Facebook social network”, I have my doubts. Maybe Elizabeth Warren actually manages to pass legislation to break up big tech, or the CZI overshoots on its stated goal of curing all disease and just ends death entirely, and this question no longer matters. But it’s also possible that when our great-great-grandchildren are playing virtual hopscotch with the Oculus Rift version 39.0.1, the VR system they are cerebrally plugged into is made and managed, along with most of the rest of people’s social interactions, by whatever group of philanthropists (?) is running the Chan Zuckerberg Institute. Of course, just because some combination of entities with “Zuckerberg” in the name control over 50% of the voting rights of Facebook, doesn’t mean they always will. I mean, tech companies are always issuing new shares to pad executive’s wallets incentivize productivity, right? Nah, actually Facebook is generating enough cash to conduct consistent share buybacks, shrinking the number of total shares outstanding. At least at the moment, the Zuckerbergs and their Initiatives can consolidate voting power just by not actively selling shares. But won’t the CZI have to sell off some stock to fund all their philanthropies? Not necessarily: many organizations with big endowments fund their operations entirely with the dividends and interest earned from their investments, and don’t have to touch the principal at all. Assuming Facebook continues to be big and profitable and powerful enough for us to care about any of this, the CZI could almost certainly do the same, and do plenty of charity-ing without having to actually sell any shares. For that matter, whoever is running it could simply change the share structure and/or voting rules in some advantageous way, because those kinds of changes require voting, and they’ve got the votes. Is any of this a problem? Maybe not: from a shareholder perspective, there are certainly examples of other corporations with multiple share classes which have don quite well for investors over long periods: Brown-Forman, Comcast, the whole family of John Malone companies. There are others which have had definite governance issues (CBS/Viacom). Generally, it seems best if control of a company is aligned with the economic interests in that company. Of course, it’s not like Facebook’s governance is totally aligned with shareholder interests currently; I’m not sure if Mark Zuckerberg’s top priority is “connecting the world” or some new objective, but I am sure it isn’t “maximizing shareholder value”. But he's already got more money than he could possibly ever spend, which mitigates a lot of the risks that come along with misalignment of control and economic interest. It’s when a not-already-fabulously-wealthy person is tasked with making decisions of huge economic value, that things can get really ugly: I've got this thing and it's fucking golden, and, uh, uh, I'm just not giving it up for fuckin' nothing.   -Rod Blogojevich I’m not necessarily accusing the future board of directors of the Chan Zuckerberg Initiative of corruption, I’m just saying it’s kinda weird that they will probably control one of the most systemically important companies in the world in addition to a well-endowed charitable organization, and the potential for some sort of trouble is definitely there. Disclosure I own shares of Facebook, but more for Rod Blagojevich-type reasons than Mark Zuckerberg-type reasons.

Footnotes

1. This organization is actually structured as an LLC rather than as an actual nonprofit organization, but that's another story.