The initial public offer (IPO) of popular social networking site, Facebook seems to have stirred a debate on the future of public companies in the west. Ahead of last week’s IPO, Facebook created two classes of shares and those sold to the public have much lesser voting rights compared to those owned by its equally famous founder, Mark Zuckerberg.
Facebook joins the club of other listed tech companies such as Google and Linkedin that have used this strategy to curb the influence of investors and to allow more freedom to their promoters. The seemingly private structure of Facebook worries the Economist, which talks about the decline of public companies in the west, as we know them, in its latest issue.
In the upcoming May 28 issue of the New Yorker, James Surowiecki puts it quite succinctly: “Whereas the CEOs of most public companies have to spend time kowtowing to investors, Zuckerberg and his peers are insisting on the right to say, ‘Thanks for your money. Now shut up.’”
Comparisons are also being drawn with family-owned firms in the emerging market that do not have as well-diversified shareholdings as their developed market peers, and are dominated by the promoters.
So, how well are these tech companies following the lead of emerging market firms?
Facebook has a clear advantage over others in this respect. Its share price has slid below the issue price in three days, a record many firms in emerging markets may find hard to match. In India, for instance, it takes anywhere between a couple of weeks to a couple of months -- on average -- for the stock price of a firm to subside below its issue price after an initial listing pop.
But even Facebook has miles to go before it can claim that it has imbibed the best practices of emerging market companies.
To begin with, Zuckerberg needs to start appointing family and friends of Priscilla Chan to senior positions at Facebook, or on its board or what is even better, hive off subsidiaries that they can run on their own. For those who have not signed up for twitter yet (may the Lord forgive you), Chan is Zuckerberg’s newly-wed wife.
Next, it must exercise discretion while sharing its performance and plans with investors. Only the bare minimum should be revealed.
In case the earnings are unappealing, it must declare them on a holiday so that most commentators give it a miss and the initial stock market reaction at least, is respectable. Under such circumstances, it can also organize briefings with a select set of analysts on its suitably vague and impressive plans for the future so that the market gets a whiff, and only a whiff, of brighter prospects ahead.
For the record, Facebook has said in its filings that it has no specific uses for the sixteen billion dollars it raised in the IPO. That simply won’t do, Sir. One can’t be blunt in these matters.
The earnings must also be declared in a sophisticated manner. If year on year growth numbers look unfavourable, it must be hidden away somewhere in the filings in 8-sized font, while the impressive quarter-on-quarter growth figures should be displayed right at the top in font sized 16.
A big constraint for firms such as Facebook in adopting emerging market norms is the stringent rule-book for listed firms prescribed by their regulators, which mandates too many disclosures. Western companies must actively start lobbying now to bring a level playing field between them and their emerging market counterparts.
Once regulations are eased, promoters of these companies will find a brave new world of possibilities opening up --- to exert greater control over their firms and to check the activism of minority shareholders.
This new world will also require new people who are trained in taking advantage of lax regulations. Western firms will find such talent in abundance in the investor relations departments of emerging market companies. A new wave of ‘brain drain’ may not be far away.