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‘Akin to a Dictatorship.’ Huge Pension Fund Calls on Mark Zuckerberg to Drop Facebook’s Dual-Class Share System

May 10, 2018, 11:50 AM UTC

The U.S.’s second-largest pension fund has called on Facebook to end the dual-class share system that gives CEO Mark Zuckerberg complete control over the company.

The California State Teachers’ Retirement System (CalSTRS,) which counts Facebook (FB) among its top 10 investments, said in a Thursday Financial Times op-ed that Facebook’s governance “is now akin to a dictatorship” if Zuckerberg does not relinquish the extraordinary control he enjoys through the system.

CalSTRS’s intervention comes after similar calls for the loosening of Zuckerberg’s grip on Facebook, from Illinois state treasurer Michael Frerichs and New York City comptroller Scott Stringer, who also wants Zuckerberg to lose his chairmanship of Facebook’s board.

Facebook has a special kind of stock (“Class B”) that comes with 10 times as much voting power as that associated with its regular Class A shares. Zuckerberg holds three quarters of the Class B stock, representing more than half of all Facebook’s voting power.

The advantage of this system is that it allows Zuckerberg to plan and execute long-term strategies without worrying about opposition from investors with more short-term concerns. The disadvantage is that, no matter how he performs, Zuckerberg is in an unassailable position.

“CalSTRS, with a portfolio of more than $220 billion, 54% of which is passively indexed, expects that when a company turns from being a private enterprise to one that is publicly traded, its governance should evolve in line with its status,” wrote portfolio manager Aeisha Mastagni.

Explaining that the fund endorses the principle of “one share, one vote,” Mastagni pointed out that it’s now been six years since Facebook’s IPO.

“Facebook has grown at an unbelievable pace. The capital structure has changed and it is time for its governance to catch up,” she wrote. “Why does Mr Zuckerberg need the entrenchment factor of a dual-class structure? Is it because he does not want governance to evolve with the rest of his company? If so, this American dream is now akin to a dictatorship.”

CalSTRS has complained about Facebook’s governance before. Back in 2012, at the time of the IPO, it criticized the company’s proposed governance provisions—however, it was at the time only invested in Facebook via private equity funds.

As of the end of last year, CalSTRS owned just over $650 million in Facebook shares.

When the Cambridge Analytica scandal hit, CalSTRS chief investment officer Christopher Ailman joined the #DeleteFacebook movement, complaining that the firm’s “lack of oversight and poor management is offensive.”

Mastagni subsequently said on April 5 that the pension fund was “establishing contact with Facebook to learn more about what controls are in place today to protect users’ data into the future.”