I started out not really caring about the Facebook IPO except as part of a vague stunt-driven desire to get some shares so I could tell you all that I'd gotten some shares. I now think that that plan was foolish, though I look forward to telling you how I was fleeced by retail brokers who pretended that they'd get me some shares. But as someone with a pretty meh reaction to good corporate governance, I've developed a certain fondness over the past, um, six days, for Facebook's terrible corporate governance, which is laid out in a section of the IPO prospectus - right after the Hacker Way - titled “I’m CEO, bitch,”* and which involves Mark Zuckerberg controlling all decisions for the rest of his natural life and any cryogenic extension thereof.
CalSTRS, however, isn't so sure:
“We are in fact in the beginning stages of engagement with Facebook” over governance issues, Ricardo Duran, a spokesman for the pension fund, said in an interview. “We are planning to send them a letter.”
Well that’s just super.
While I'm sure there will be a letter (wall post? please be a wall post), it's probably not meant to be taken all that seriously. Facebook’s IPO filing kicked off a three-month process of debating how much it’s worth for fun and profit but mostly profit. Lots of investors are now effectively short Facebook (since they have to buy it in at market levels when it IPOs) and so have every incentive to make arguments that this is the worst company in the history of public equity markets and destined be a bankrupt Friendster also-ran in five years. Because that will help them get a $50mm slug at a $95bn rather than $100bn valuation.
Perhaps more important for CalSTRS, it and its buddy CalPERS have reputations to defend as champions of good governance, so for them to just buy swathes of the Facebook IPO without complaining noisily about governance would be bad for their street cred. (Though it may already be too late for that.) Winning the Facebook governance battle isn't that important, but fighting it matters, so that the California public pensions can push hard on governance at other companies that aren't doing public investors a favor just by letting them invest.
Still it's not the easiest case here. Here’s CalSTRS portfolio manager Janice Hester-Amey:
"No matter how brilliant you are, when you come to the public market -- not that we want to ever tell Zuckerberg or anyone like him how to run his company -- there should be some protection especially for long-term, patient money like CalSTRS," Hester-Amey said.
"So I think there should be some more respect for capital," she said.
Well sure whatever except what is capital? I guess it’s, like, if I have money that I earned from blogging or whatever, and you come to me and are like “can I have some money to open my lemonade stand?,” and I give it to you, then I’m “capital” and should be respected. And I suppose if you come to me and are like “can I have some money to open my long/short citrus hedge fund?,” and I give it to you, and you invest it in lemonade stands, then … I’m your “capital” and should be respected by you, and you’re the lemonade stand proprietor’s “capital” and should be respected by her. Turtles. Maybe.
But CalSTRS is only sort of investing its "own" money - it's investing money that will one day go to its beneficiaries, California public school and community college teachers. And for those teachers, it provides the dual benefit of:
(1)Making money and
(2)Promoting the things it values, which include prominently good shareholder governance.
Goal (1) is unambiguously good for the teachers whose retirements CalSTRS funds. Goal (2) is - well, CalSTRS thinks it's good anyway. But it's interesting that some of the loudest proponents of corporate governance are public pension funds whose beneficiaries can't move. CalSTRS can afford to pass on a hot IPO because the company has a staggered board and too few independent directors. A low cost index fund may not even be able to afford even to vote its shares, since it may be too busy lending them out to get a few basis points of extra return. Because, while I can always move out of an index fund that gets too expensive, California teachers can't really quit CalSTRS. And public pension fund governance isn't always so hot itself.
Of course, governance activism doesn't just come from public pensions. Some people have investors who actively seek them out because they have a reputation for being good active owners, and those people want to be able to be active owners since that's part of their value proposition. Bill Ackman has investors who value him for not just choosing good companies, but for choosing companies that could be made better, and for making them better. Some recent research suggests that more shareholder governance rights improves firm value - for firms that have lots of activist shareholders. In other words, good governance is a good thing when a company is badly managed and attracts shareholders who think they can fix it. It's a meh thing when shareholders trust management's vision and execution.
But you don't hear a lot of activist fund managers saying "I want Facebook to abandon its dual-class shares so I can come in and turn it into a REIT." Facebook, like CalSTRS, has a dual mission - implicitly it plans to make oceans of money; explicitly it plans to "make the world more open and connected." So far those missions have worked reasonably well together - especially if by "make oceans of money" you're talking about shareholder exits rather than revenues - and, in any case, just maximizing ad revenue as soon as possible would run the risk of making Facebook disappear in a cloud of angry tweets.
Facebook, anyway, thinks that the dual mission is a good idea. And while it will take capital from outside, it's decided to ask the owners of that capital to give up control over the enterprise and just trust it to look out for them in the long run by pursuing a socially oriented dual mission that may not be in their immediate economic best interests. Y'know, kind of like CalSTRS does.
Facebook Governance Challenged by Pension Fund [Bloomberg]
* This is not true.