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Is Facebook (FB) Better Off Without Mark Zuckerberg?

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Business Insider reported on Tuesday about a group of Facebook (FB - Free Report) investors who collectively hold $3 billion in company stock, and are seeking to remove Mark Zuckerberg from his position as chairman of the company. As per the article, the investors cited dissatisfaction about the firm’s recent scandals as well as what they feel is an unfair distribution of voting rights as motivation for seeking a leadership change.

Facebook stock is divided into two categories: Class A and Class B shares, each with their own voting rights. Class A shares are worth one vote each, while Class B shares are worth ten votes each. Zuckerberg owns more than 75% of Class B stock, meaning that he has more than half of the voting power in the entire firm.

Investors are unhappy with this arrangement because they feel that it insulates him from any challenges to his authority. This concern was illustrated at last year’s investor meeting, during which a proposal to remove him as chairman was both quickly and entirely shut down. Considering the troubles that have recently plagued Facebook, would it be be a good idea for Zuckerberg to step down? Let’s take a walk down memory lane before we consider the question.

A Story You May Be Familiar With 

In 1985 a thirty-year old Steve Jobs found himself pitted against John Sculley, the then-CEO of Apple (AAPL - Free Report) , whom he had originally recruited from Pepsi (PEP - Free Report) . At the time Jobs was leading the Macintosh team, which was the company’s single most lucrative product line up until that point. Jobs wanted to price the computer at a point that would make it accessible to the average consumer, but Sculley argued that a low price would lead to inadequate profit margins.

This disagreement, along with ideological differences on the future of the company would continue to escalate. The firm’s board of directors sided with Scully, and Jobs proceeded to leave the firm later that year. It was not until 12 years later, after years of overall underperformance and the possibility of bankruptcy, that Jobs would be brought back on as CEO.

As the story goes, Jobs, through various restructuring efforts and a previously unthinkable partnership with Microsoft (MSFT - Free Report) , turned the firm around and led the way for Apple to become what it is today. To many, the outing of Jobs by his own company was a necessary growing pain. Regardless of one’s feelings on the matter, the numbers show that it was his return that saved the firm. Perhaps it was the time Jobs spent on other ventures that set him up to succeed, or maybe investors just needed to reach a desperate enough point to listen to his ideas. Either way, Apple was better off with its founder.

While the Apple story is by no means a perfect parallel to that of Facebook’s, from it we can draw the conclusion that perhaps it is the person who has built their firm from the ground up that truly understands what is best for its future. However, it would be irresponsible to just make such a claim and stop there. Let’s see how this thesis holds up in another more recent situation.

In More Recent Memory

Up until quite recently, Uber’s Travis Kalanick was as untouchable as Zuckerberg appears to be now. The founder and now former-CEO had control of both the firm’s voting rights as well as its board of directors. Kalanick purposely left four of the board’s eleven seats empty, and of the remaining seven (one of which is him), only two seats belong to outside investors. But, what is interesting about the Uber situation is that investors were still able to succeed in taking back some of this power.

By the time Kalanick would step down, he too was no stranger to controversy. Media headlines have included outcry on Kalanick’s crude humor, user privacy violations, a Google lawsuit over Waymo technology, illicit competition strategies, and an online #DeleteUber protest, just to name a few. By June of 2017, a group of investors who own more than a quarter of the company’s stock had seen enough and demanded his resignation through letter. They threatened to release the letter online and add to the firm’s PR woes in the event that Kalanick refused to do so. He would step down later that day.

Uber has become unrecognizable to those who have seen the firm’s transition from the management of Kalanick to current CEO Dara Khosrowshahi, who before Uber sat at the reigns of Expedia Group (EXPE - Free Report) . Whereas Kalanick encouraged growth at all costs, Khosrowshahi constantly reminds his team to operate in baby steps, focusing on first optimizing the application’s current features before thinking to release new ones. However, so far things appear to be going rather well.

When Khosrowshahi came into Uber, he inherited a slew of unresolved issues. This included the Waymo lawsuit, the hacking and theft of the data of 57 million customers and drivers, which was purposely hidden from the public for a year, as well as a ban on all operations in London. Thus far, the lawsuit has been settled, new security measures taken, and on Tuesday, the firm was granted a 15-month license to resume operations in London. In January of this year, the firm sold an additional $8 billion in stock to a group of investors led by Softbank, a deal which also brought an end to the lopsided distribution of voting rights held by Kalanick and his allies.

While Uber still has many challenges ahead, including stringent competition from rival services and controversy over its self-driving initiative, the changes created through the resignation of its founder Travis Kalanick are clear to see. Unlike Apple, it may be better for the firm’s long-term health to move on from Kalanick for good.

Back to the Present

In the case of Apple and Uber, leadership change was necessitated by underperformance and significant controversy at the behest of its founders. Facebook, however, has been one of the strongest performing companies in recent memory, having seen whopping 705% growth in stock value over the last five years (compared to a still respectable 91.3% industry average return).

Still, investors are unhappy and have stated that they feel he is running the company like a “corporate dictatorship.” These concerns were amplified in the wake of the Cambridge Analytica scandal that saw Facebook used as a tool to illicitly collect data on millions of its users and utilized for such purposes as building voter profiles during the 2016 presidential election. This was not the sole controversy, serving as only one on a list that includes retaining users’ deleted videos, Russian interference and the propagation of “fake news,” to name a few. Many feel that these challenges, coupled with what they see as an overly inexperienced leader in Zuckerberg is a potentially dangerous combination.

While there is certainly credence to concerns about Zuckerberg’s consolidated power, some of these arguments are flawed. Yes, Facebook should be doing more to respect its users’ privacy and to diligently monitor the possibility that their information be exploited. Facebook itself has made a lot of its money by effectively turning its user base into a product and collecting browser usage and other data to sell to advertisers.

The issue however is that there is very little precedent to just about everything that the firm has accomplished. Never before has there been an entity with as large and as detailed a collection of information as Facebook. The question of how this information should be utilized and regulated is one that firms such as Apple, Alphabet (GOOGL - Free Report) , Snap (SNAP - Free Report) , and many others are grappling with as well. These firms also collect data about its users and target them through partnerships with advertisers. In this sense, Zuckerberg is being used as a scapegoat to mask a broader question, that being how society will approach the nuanced questions of this information golden age.

If Zuckerberg can commit to more transparency and to more evenly distributing decision making privileges across his firm’s governance structure, it is hard to see what other legitimate reason there would be to replace him. The controversies and challenges that he has struggled with are one that any other executive would struggle with as well, because there is no point of reference under which to operate. In this sense, it is hard to imagine a scenario in which Facebook will be notably better off without its hoodie-loving founder.

Time will tell if Facebook can continue its massive growth, and many eyes will be watching to see how it handles its data and potential future controversies. But for now, let’s take a deep breath and give Mark some more time.

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