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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 performance.

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 its size.

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 worse performance."

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 stated in an email to

"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."

"Years ago 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.'"


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