February 08, 2012
CalSTRS to Facebook: More Women on Board
by Robert Kropp
The pension fund's Director of Corporate Governance writes to Mark Zuckerberg, expressing
disappointment in the lack of diversity on Facebook's board of directors.
As Facebook heads toward its highly anticipated $5 billion initial public offering (IPO) in May,
shareowner activists and corporate governance advocates have expressed concerns over the form that
governance at the social media giant is likely to take.
Numerous media sources
reported this week that Anne Sheehan, Director of Corporate Governance at the California State Teachers' Retirement System (CalSTRS), has
written to CEO Mark Zuckerberg, stating, "We are disappointed that the Facebook board will not have
any woman members."
"This is particularly glaring at a time when there is clear evidence
that companies with diverse boards perform far better than the companies with more homogenous
boards," Sheehan continued.
In recent years, many reports have identified a correlation
between board and management diversity and corporate performance. Links to several of them can be
found at the website of Pax World Management, whose Global
Women's Equality Fund (PXWEX) invests primarily in large-cap companies that promote gender
equality and women's advancement.
Board diversity is but one of the decisions made by
Facebook that are at odds with what corporate governance advocates consider best practice.
Because Facebook has had a dual-class stock ownership structure since 2009, Zuckerberg—whose
28% ownership is the largest single stake in the company—controls 57% of its proxy voting power.
A dual-class structure is comprised of one class of shares for outside investors, and one
that confers majority voting status for insiders. GovernanceMetrics International (GMI) has identified a
dual-class structure as a significant corporate governance concern.
In its IPO filing,
Facebook announced that it will be run as a controlled company; that is, all matters, from the
election of board directors to executive compensation, will be determined by Zuckerberg.
The independence and size of Facebook's board of directors is another concern. After the
company goes public, Zuckerberg will serve as both Chairman and CEO; increasingly, sustainable
investors and governance advocates view separation of the two positions as critical factors for
board independence. An individual who holds both positions is, in effect, overseeing his or her own
As Interfaith Center on
Corporate Responsibility (ICCR) points out in its 2012 Proxy Resolutions and Voting Guide,
"Shareholder resolutions urging separation of CEO and Chair averaged unusually high proxy votes of
29% at 36 companies in 2010, an indication of strong and growing investor support."
Companies that have the same individual in both positions usually designate a board member as
an independent lead director. At Facebook, the lead director is Donald E. Graham, who is Chairman
and CEO of the Washington Post Company.
As Paul Hodgson pointed out in a recent GMI blog post, Graham's role with Facebook can hardly be considered independent.
For one thing, the Washington Post has purchased millions of dollars in advertising from Facebook
for each of the past two years.
Secondly, Graham's daughter is an employee of Facebook.
CalSTRS has also expressed concern that Facebook's board has too few members for a company
Facebook will also have a classified, or staggered, board, in which directors
serve overlapping terms. According to the American Corporate Governance Institute (ACGI), "There is significant
empirical evidence suggesting that classified boards could be associated with lower valuation and
Most large public companies appear to agree with ACGI's finding; by
2011, only one-third of S&P 500 companies had a classified board. And those that don't agree are
hearing from shareowners: votes in favor of board declassification proposals averaged 72% in the
2011 proxy season.
Zuckerberg has also retained sole discretion in naming his replacement.
The exposure of investors to the potential impacts of Facebook's corporate governance
decisions could be considerable, James McRitchie of CorpGov.net stated in an email to SocialFunds.com.
"Since Facebook will be huge, many indexed funds will be forced to buy it, no matter how high
it is valued, and no matter how poor its corporate governance," McRitchie wrote. "Of course,
Facebook should have a more diversified board. Zuckerberg should be happy to have substantial
influence, instead of dictatorial authority; but he wants to maintain control."
we watched as credit rating organizations improperly valued real estate derivatives," McRitchie
continued. "We're spectators once again as another house of cards is stacked too high. Like
housing, this bubble will also burst."
In an interview, Janice Hester-Amey of CalSTRS'
Corporate Governance division said, "No matter how brilliant you are, when you come to the public
market…there should be some protection especially for long-term, patient money like CalSTRS. I
think there should be some more respect for capital."
And Hodgson of GMI wrote, "That all
adds up to 'we want your money, not your interference.'"