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Power Sheet – April 29, 2016

After Facebook announced stupendous results Wednesday – revenue up 52%, profits tripled, both measures leaping from already high bases – who would deny that CEO Mark Zuckerberg at age 31 is one of the great business leaders now working? Not me. He has shepherded the company from non-existence just 12 years ago to a market value of $332 billion, fifth greatest in America, ahead of Johnson & Johnson and General Electric. It’s an astounding achievement. And yet – there was a nearly inaudible sour note in Facebook’s news on Wednesday, and I regret to say that it does not bode well.

It was the announcement of a new class of non-voting shares that will be distributed to all Facebook shareholders. Why? Facebook already has two classes of stock, Class A and Class B, created when the company went public to ensure Zuckerberg would retain total control of the company. The Class A shares have one vote each, and Zuckerberg owns a tiny percentage of them; the Class B shares have 10 votes each, and he owns 85% of them. Overall, he owns 16% of the company but wields 60% of the votes. The new Class C shares are being created for one purpose only: to allow Zuckerberg to maintain control while he and his wife fulfill their pledge to give away 99% of their Facebook wealth. He will be issued a ton of the non-voting Class C shares, and those are the ones he’ll donate.

He and the company were refreshingly candid about their motives. “I’ll be able to keep founder control of Facebook so we can continue to build for the long term, and Priscilla and I will be able to give our money to fund important work sooner,” he said in a statement. It all sounds great – giving billions to worthy causes, building Facebook for the long term. But multi-class ownership structures have a long history, and they always sound great when things are going well. When things stop going well, which is guaranteed to happen eventually, the trouble starts.

The reason is obvious. The board’s most important job is to make sure the company always has the right CEO, and if it doesn’t, to change the CEO. But in a multiple-class company like Facebook, the board can’t fire the CEO. Just the opposite: The CEO can fire the board, which means he can do almost anything he wants. If he wants more income, he can make the company pay out bigger dividends even if that’s bad for the business; it happened at Readers Digest Association when it had a multiple-class structure. Or he can push through any other plan he likes. For example, Facebook’s new class of stock must be approved by a shareholder vote. Care to guess how the vote will turn out?

Multiple-class structures ensuring founder control are common in the media industry – Comcast, New York Times, and News Corp. use them – and in Silicon Valley, where Alphabet, Zynga, Groupon, LinkedIn, and others use them. Investors must remember that they’re betting not on an institution but on a person and maybe that person’s progeny; all three of the media companies cited above have second- or later-generation leaders, for example.

As for Facebook – all hail Zuckerberg! Truly. He is a phenomenon. But the argument in favor of Facebook’s governance set-up is the same argument made in favor of benevolent dictators.

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What We’re Reading Today

CBS weighs life after Redstone 

Les Moonves and CBS execs have spoken with investment banks to discuss how the CEO can gain more control over the company after Sumner Redstone passes away or if he’s declared mentally incompetent. Redstone stepped down as CBS chairman earlier this year, but he still owns 80% of the company through National Amusements. But the 92 year-old Redstone is at the center of a competency dispute in court between his family and a former companion. Moonves is considering purchasing the CBS shares from National Amusements, and ending its dual-class stock structure.  Reuters

Verizon meets with striking workers

But no deal was reached. Lowell McAdam‘s company offered 7.5% of total wage increases, job security protections, and some changes to the company’s pension, among other things, but the union has rejected it. The representatives of the Verizon wireline union workers said it didn’t seem the offer was serious, while Verizon called it their “last, best final offer.”   Fortune

AB InBev offers to sell more brands

To close the deal between Anheuser-Busch InBev and SABMiller, AB-InBev CEO Carlos Brito says he’d unload SABMiller’s Central and Eastern European brands, which includes Pilsner Urquell. The offer, which would take place post-merger, comes as a European Commission nears a decision on whether the $108 billion deal between the two biggest beer distributors in the world can move forward. WSJ

Priceline CEO ousted after an affair

Darren Huston stepped down from the travel-booking site after an internal investigation found that he had an affair with an employee. The company said that the employee wasn’t under the direct supervision of Huston. Chairman Jeffrey Boyd will serve as interim CEO until a permanent replacement is found. CNNMoney

Building a Better Leader

Even this salad chain wants to call itself a tech company

Its in-house tech team and algorithm for ordering has netted Sweetgreen with $95 million in venture capital. Inc.

Younger workers have the highest rates of anxiety and depression

Senior managers are wondering if the issues will affect how these workers will handle the ups-and-downs of demanding office environments. Fortune

Why has productivity stagnated?

There’s a depressing explanation, which suggests Americans’ standard of living is on the decline, and an upbeat one, which argues that productivity growth is around the corner. NYT

Worth Considering

Icahn unloads Apple shares because of China 

Activist investor Carl Icahn sold his shares in Apple because he’s worried about Apple’s relationship with Chinese President Xi Jinping. After it suspended iBooks and iTunes Movies in the country, investors are questioning whether Tim Cook will encounter even more difficulties in China. Fortune

Credit Suisse CEO asks for patience

Chief Executive Tidjane Thiam has taken heat since announcing a restructuring of the bank. Investors have fled, sending shares down by 40% since July. Thiam is trying to reduce Credit Suisse’s exposure to investment banking and bulk up its wealth management operations. He reiterated that it would take time, but long-term, it’s the best strategy. Reuters

VW chief apologizes to President Obama 

CEO Matthias Müller said that he spoke to President Barack Obama at a dinner hosted by German Chancellor Angela Merkel during the president’s visit last week. The two spoke very briefly, but Müller said that he apologized for the cheating scandal and “expressed the hope that I can continue to fulfill my responsibilities for 600,000 workers, their families, the suppliers, the dealers.” The Obama administration has not commented on the exchange. AP

Up or Out

TJ Rodgers will step down as CEO of Cypress Semiconductor. He will remain on the board and will be active with technical projects. WSJ

Google has hired Rick Osterloh, former president of Motorola. He will run a new unit focused on hardware. Fortune

Fortune Reads and Videos

Atlantic City could default this Sunday

Cash levels are so poor, it may miss a $1.8 million debt payment. Fortune

Ronald Reagan’s family blasts Will Ferrell’s new movie

The upcoming comedy will portray Reagan‘s battle with Alzheimer’s. Fortune

Uber plans to charge you for making your driver wait 

If you make your driver wait longer than two minutes in certain cities, your fare will begin. Fortune

The prediction market gives Ted Cruz virtually no chance… 

…to win the Republican nomination. He’s behind a “Candidate-To-Be-Named-Later.” Fortune

Happy Birthday

Bernie Madoff turns 78 today.  Biography

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@ryanderous
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