Board member Peter Thiel's stock sale adds to concerns about board structure and dual class share structure, according to GMI.
Facebook’s ‘poor governance’, plus recent large stock sales by board member Peter Thiel, will likely see the social network firm drop to the bottom 5 percent of companies on the ratings list of GMI Ratings, the independent environmental, social and governance ratings company says.
GMI Ratings placed Facebook on watch for a potential downgrade from its current ‘D’ rating to a possible ‘F’ after news emerged that Thiel sold $400 million worth of shares in late August, GMI senior research associate Greg Ruel wrote in an alert on GMI’s website. The sale brings to $1 billion the value of shares in Facebook that Thiel, a founding investor, has sold since the $16 bn IPO in May. ‘This divesture news has Facebook on watch as a company likely to join the 5 percent of companies we rate ‘F’,’ Ruel wrote.
‘To those who have been paying attention since the beginning, the company’s poor governance has been an unmistakable warning sign for investors to take heed, and a clear opportunity to avoid the resulting massive destruction in share price.’ Besides Thiel, founder Mark Zuckerberg sold more than $1 billion in Facebook shares in May, and James Breyer, chairman of the compensation committee, sold more than $2.1 billion at the IPO, GMI says.
Thiel’s latest stock sale adds to a list of GMI complaints about recent management moves by Facebook, ranging from its dual-class share structure, the makeup of the company’s board and the resignation of executives to executive perks and incentive pay performance targets.
GMI protested the naming of Facebook chief operating officer Sheryl Sandberg to the board, an appointment that GMI says was Facebook’s ‘rather defiant response’ to criticism that its board lacked diversity. ‘All told, Facebook’s board now consists of two inside directors, two large investors, and four more directors who either have substantial related-party transactions with the company or were nominated to the board by Zuckerberg himself,’ GMI writes. ‘It’s hard to point to a single director who has the long-term interests of the company’s independent shareholders as their first priority.’
Facebook’s dual-class shareholder structure is another hindrance to good governance, leaving Zuckerberg with control of 61 percent of voting shares. ‘Zuckerberg is ostensibly free to ignore the opinions of common stock shareholders and exert complete control over the company,’ GMI says. ‘However, given the management-friendly structure of the board, it’s difficult to envision he’ll receive much internal opposition from a board tasked with management oversight.’
GMI also criticized executive perks as ‘exceptionally high’ and pointed to 2011 compensation figures of $31 mn for Sandberg, $25 million for vice president of engineering Mike Schroepfer, and $19 million for chief financial officer David Ebersman.
