The Most Secure CEO in America

In an earlier post just prior to Facebook’s IPO I outlined the challenges facing the company regarding justifying a P/E ratio higher than 99 percent of the Fortune 500.  Since then further worries have come up regarding whether Facebook can grow ad revenue as users switch to mobile devices.  But investors need to heed one more thing: you had better completely trust that Mark Zuckerberg is the perfect CEO to make it happen.

Because of a dual class stock structure Zuckerberg owns 28 percent of Facebook but controls 57 percent of any shareholder vote.  Or to put it another way the only person who can fire Mark Zuckerberg is Mark Zuckerberg.  And you thought that being a multi-billionaire before age 30 was the only reason to be envious of him.

It is not as though these dual-class arrangements are unusual.  Google co-founders Larry Paige and Sergey Brin together own eight percent of Google but together hold 57 percent of the vote.  But at least one can make a scenario that if the two of them divide on an issue, and the remaining shareholders back one of them, that the other can be overruled.  It may be a long shot, but at least there is a scenario that could be described as their  being held accountable to the shareholders.

Despite Facebook being a publicly traded company, Zuckerberg can run it like it was a sole proprietorship.  Even shareholder lawsuits and Senate investigations could not jeopardize his CEO position.

Part of what this means is that there is an additional level of instability to the stock.  With most companies if performance doesn’t satisfy them the stockholders can either sell or demand a change of CEO.  With Facebook there is only the first option.  So what might start as a correction could turn into a stampede.

Now one reaction to all this might be: “Don’t like it?  Don’t buy it!”.  That may be harder than it sounds.  The Nasdaq 100 index automatically contains the top 100 non-financial firms traded on the Nasdaq index.  Facebook debuts at number nine, representing about three and a half percent of the value of any Nasdaq 100 index fund, Nasdaq 100  ETF, or Nasdaq 100 futures contract.  Total market indexes such as the Russell or Wilshire indexes will automatically include Facebook with the next monthly adjustment.  So all broad market funds and ETF’s will have a toe in the Facebook pond.

The big step though will be when the Standard and Poor’s market committee meets.  As the roughly 20th largest market capitalization company on the market, there will be considerable pressure to make space for it in the S&P 500 or risk irrelevance to the index.  And the quantity of money in S&P 500 index funds, S&P 500 ETFs, S&P 500 futures, and funds that compare their performance to the S&P 500 is huge.  If that happens it will be a rare portfolio that could honestly claim to have no exposure to FB.

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