Diatribes of Jay

This blog has essays on public policy. It shuns ideology and applies facts, logic and math to social problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear.

24 October 2021

Zuckerberg’s Accountability


For brief descriptions of and links to recent posts, click here. For an inverse-chronological list with links to all posts after January 23, 2017, click here. For a subject-matter index to posts before that date, click here.

One man, Mark Zuckerberg, personally and individually controls Facebook and everything it does. The company is what the NASDAQ stock exchange, on which its shares are listed, calls a “controlled company.” It has been so since its initial public offering (IPO) in May 2012.

Facebook’s official IPO prospectus [search for second instance of “controlled”] confessed as follows:
“Mr. Zuckerberg, who after our initial public offering will control approximately 55.9% of the voting power of our outstanding capital stock, will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors, as well as the overall management and direction of our company. In the event of his death, the shares of our capital stock that Mr. Zuckerberg owns will be transferred to the persons or entities that he designates.”

“Because Mr. Zuckerberg controls a majority of our outstanding voting power, we are a ‘controlled company’ under the corporate governance rules for NASDAQ-listed companies. Therefore, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function and to have the full board of directors be directly responsible for nominating members of our board.”
On April 9 of this year, facebook re-confessed, in its very own proxy statement [DEF 14A (Proxy Statement), 2021-04-09, page 2, CONTROLLED COMPANY STATUS ]:
“Because Mr. Zuckerberg controls a majority of our outstanding voting power, we are a ‘controlled company’ under the corporate governance rules of The Nasdaq Stock Market LLC (Nasdaq). Therefore, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function.”
A 2018 news article reported that “Zuckerberg and a small group of insiders” control “almost 70 percent” of shareholders’ votes. The reason? The Class B shares they control have 10 votes per share, while the publicly traded Class A shares have only one. While the supermajority ownership is not illegal, it makes Facebook, in practice, more like a small partnership than the widely traded public company it purports to be.

In its April 2021 proxy statement, Facebook claimed that “we have nevertheless opted, under our corporate governance guidelines, to have a majority of the members of our board of directors be independent.” An opposing proxy statement, filed by the State Treasurer of Illinois, vigorously contested this claim. It recommended a shareholder proposal that would have required Zuckerberg to step down as board chair, and Facebook to adopt rules for a more independent board. It claimed that: “1. Only one of Facebook’s nine board members is completely independent. 2. An independent board chair is best governance practice. 3. Ongoing controversies signal a need for a leadership change.”

The State Treasurers of Pennsylvania, Rhode Island, and Vermont, plus the Sisters of the Holy Names, supported this shareholder proposal. A similar proposal made the previous year reportedly received 64% of non-insider votes. Guess which side won this year’s proxy contest.

What these facts prove is that Zuckerberg, and he alone, personally controls Facebook’s management structure and governance, and thus all that Facebook does. The Attorney General for the District of Columbia recently recognized this reality, adding Zuckerberg’s name as individual defendant in an action based on the Cambridge Analytic privacy scandal. Just days ago, reporting revealed that Facebook had done little or nothing after employees raised alarms about Facebook posters’ influential participation in the Qanon Conspiracy and the Big Lie that Biden and fraud stole the 2020 presidential election.

Even in our corporation-loving society, the kind of absolute control that Zuckerberg has over Facebook is extremely rare. Start-up companies, financed by venture capital, usually have their founders’ shares “diluted” out of control by the second or third round of private financing. By the time they “go public,” their founders and top executives hold nowhere near a majority of voting rights. Instead, big investment firms collectively hold the vast majority of voting shares—institutions like state pension funds, Vanguard, Goldman Sachs, and Blackrock.

Among the “Big Five,” only Google’s holding/parent company Alphabet is also a “controlled company.” Amazon, Apple, and Microsoft are not. And even Google is controlled only by its two founders together, Larry Page and Sergey Brin, not a single individual. Relative to Facebook, most US corporations, including tech firms, are democracies like the US (so far), England, France and Germany. Facebook, in contrast, resembles China under Xi Jinping’s dictatorship.

Executives’ general lack of personal control of public companies has real consequences. For example, Steve Jobs, the innovative founder of Apple and its long-time CEO, was ousted in a corporate revolution and spent years in “exile” in his own firm Next, Inc. There he developed the guts of Apple’s computer operating system OS X and eventually returned in triumph to work on the iPhone.

When corporate limited liability arose in Britain and Europe during the Enlightenment, it had two purposes. The first was to encourage passive investors to support productive business by shielding them from liability for business mistakes and wrongs that they could not control. A second purpose was, by encouraging private financing of business, to free economic productivity from politics and what was then seen as oppressive royal influence and control.

Neither of these rationales applies to Mark Zuckerberg. No Enlightenment economist or thinker could ever have conceived of the power that Facebook has today—with income larger than that of many Enlightenment nations and nearly one-third of the human species as regular users. None could ever conceive that a lone man who controls all that power would have zero accountability for the wrongs he puts in motion. We all have witnessed Facebook’s historically unsurpassed power to corrupt culture and coarsen politics by propagating lies and hate.

Modern corporate law allows courts to pierce the “corporate veil” when a corporation becomes the “alter ego” of its human head. Facebook is far more than Mark Zuckerberg’s alter ego. It’s his avatar. With his complete control of the institution, he is responsible for every major mistake it makes, including every inability or refusal to remove harmful misinformation and lies from its platform.

Zuckerberg may not have actually been in the room when every decision was made. But he has the sole and complete power to reverse or modify it, without regard to anyone else’s opinion. He has repeatedly refused to exercise that power, even when urged by Congress, powerful leaders (even powerful Republicans!), and his own employees and fellow executives.

Whether in England or the US, old common-law judges would have made short work of Zuckerberg’s denials and excuses. They would have had no trouble finding Facebook to be his alter ego, and him responsible for the wrong Facebook has done and the lies it has propagated. But today’s leaders in Congress (most of whom were trained as lawyers) are mesmerized by statutes. They have forgotten the common law, and with it common sense.

Congress and our federal regulators could enact two simple remedies. First, they could make individuals like Zuckerberg, who absolutely control a corporation like Facebook, civilly and criminally liable for its wrongs. Second, Congress could repeal or amend Section 230(c)(1) of the so-called Communications Decency Act of 1996, which excused internet platforms from the same liability for defamation that had long restrained newspapers, magazines, book publishers, and TV and radio broadcasters from knowingly or recklessly spreading lies.

The choice is between a properly informed, stable and rational society and a new Dark Age of lies, confusion and conflict, brought to us for profit by individuals like Zuckerberg. Does this 37-year-old nerd, whose personal motto was "Move fast and break things,” really deserve a completely free pass?

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