1) What are your thoughts on Zuckerberg’s comments on not stepping down as chairman and showing support to Sheryl Sandberg?
While institutional investors are well-aware of Mark Zuckerberg’s impregnable control over Facebook governance through his ownership of super-voting shares that give him the ability to fire the entire board of directors along with his sole right to designate his successor as CEO, the broader public (e.g. CNN) may not. Consequently, to our view, any comments Zuckerberg makes on Facebook governance are largely irrelevant because the company will remain firmly in his grasp whether he serves as chairman or not. Meanwhile, Zuckerberg does need the ongoing involvement and management support of Facebook COO Sheryl Sandberg, if for no other reason than to have someone other than himself to be held responsible for the mounting litany of predicaments in which the company finds itself. Note that with increased regulatory scrutiny both at home and abroad, Facebook’s business model is under review for the foreseeable future.
2) Is this the best decision for the company?
Were Zuckerberg to step down as Facebook Chairman, the move should be viewed as being primarily cosmetic given his super-voting control of the company and sole selection right for his eventual CEO successor discussed above. For all intents and purposes, Zuckerberg is Facebook and Facebook is Zuckerberg. Possibly regulators might view this as being an abuse of the corporate veil, but whether Zuckerberg will be held personally accountable for such actions as inciting ethnic cleansing in Myanmar or aiding and abetting foreign government interference in elections remains for regulators and legislators to decide. Meanwhile, with such a regulatory cloud over Facebook, expect advertisers to move away from the medium as Facebook’s user base stagnates and declines absent radical reform.
3) What needs to happen in order for Facebook to do better in light of their recent controversies?
Even if Facebook were to accept that it is the media company that it is and subject itself to appropriate oversight and adopt requisite best practices, this is a company that needs to be restructured so as to eliminate operations where egregious violation of individual privacy rights and broader societal civil rights have occurred repeatedly over an extended period of time. An organization that incites wholesale ethnic cleansing and undermines the operation of liberal democracy is not a good corporate citizen deserving of equal protection under the law. It should be left to the recognized legal authorities to determine whether the company and its management’s actions breach the threshold for criminal activity, but it is clearly a question that should not be far from investors’ minds.
4) Current rating and/or price target on the stock?
With FB trading off to share price levels not seen since 1H17, clearly a fair level of risk has been priced into the stock. That said, the Democratic House majority in the incoming 116th Congress is likely to press further on the topic of social media reform. In this effort, we expect Mark Zuckerberg to be front & center so the negative news flow around Facebook is unlikely to abate in the near term. The fact that company’s business model is in question remains a material negative in considering a possible purchase of Facebook shares. Accordingly, we are at best neutral and would consider other Tech sector companies such as AAPL or AMZN to be better investment candidates.