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Facebook, Inc.: A Look at Corporate Governance

Sarah Jones returned to her desk after the half-hour meeting with her manager, Joe Thomas. She was
excited about her first assignment as an analyst at Salomon Partners, an investment research company that sold
reports to a variety of clients. Thomas had asked her to write a report on the governance structure at Facebook,
Inc. He had recently read an article in the Wall Street Journal suggesting that technology companies were
increasingly using multiple classes of shares when going public.1 He anticipated having to field questions about
what that meant for his clients who had invested in, or were thinking about investing in, Facebook, as he knew
the company had an interesting governance structure. Thomas wondered what he could learn from Facebook.
He asked Jones to investigate, and he suggested she start by reading Facebook’s annual proxy statement.

Company Description

Facebook was a large US social media and social networking company headquartered in Menlo Park,
California. According to its website, Facebook’s mission was “to give people the power to build community
and bring the world closer together. People use Facebook to stay connected with friends and family, to discover
what’s going on in the world, and to share and express what matters to them.”2 In addition to the social
networking site Facebook.com, the company’s products included Instagram, an online community for sharing
visual stories using photos, videos, and messages; Messenger and WhatsApp, both messaging applications; and
Oculus, a virtual reality platform. The company’s revenues, which totaled $40.7 billion in 2017, came primarily
from advertising. The company had more than 25,000 employees at the end of 2017. (Facebook’s consolidated
balance sheets and consolidated statements of income are presented in Exhibits 1 and 2.)

Facebook was founded in 2004 by Mark Zuckerberg, at the time a 19-year-old student at Harvard
University, along with his Harvard classmates Dustin Moskovitz, Chris Hughes, and Eduardo Saverin.3 Born
in White Plains, New York, Zuckerberg began writing computer code and software in middle school. His father,
a dentist, and mother, a psychiatrist, hired a tutor to work with Zuckerberg in response to his interest, and
Zuckerberg was soon taking graduate courses. He continually developed new computer programs, including
computer games, a messaging program called “Zucknet” that his family used to communicate throughout their
house, and a music software program. Declining job offers from tech companies like AOL and Microsoft,

1 Maureen Farrell, “Tech Founders Want IPO Riches Without Those Pesky Shareholders,” Wall Street Journal, April 3, 2017,

https://www.wsj.com/articles/control-geeks-tech-founders-want-ipo-investors-not-their-input-1491236464 (accessed May 25, 2018).

2 Company Info, https://newsroom.fb.com/company-info/ (accessed May 25, 2018).
3 Although not listed on Facebook’s founders page, Andrew McCollum also played a part in the founding of Facebook by designing the website’s

appearance, then working in the company’s headquarters. He left Facebook to return to college in 2005. See Matt Cantor, “There’s a Facebook ‘Founder’
You’ve Never Heard Of,” Newser, February 7, 2015, http://www.newser.com/story/202222/theres-a-facebook-founder-youve-never-heard-of.html
(accessed May 25, 2018). This paragraph is based on information from “Mark Zuckerberg,” Biography, https://www.biography.com/people/mark-
zuckerberg-507402 (accessed May 25, 2018).

This case was prepared by Luann Lynch, Almand R. Coleman Professor of Business Administration, and Justin Hopkins, Assistant Professor of Business
Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright © 2018 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by
any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the
highest quality, so please submit any errata to [email protected].

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Zuckerberg enrolled at Harvard in 2002. There, he developed a computer program called CourseMatch, which
helped students choose classes based on what other users had decided to take, and Facemash, which compared
pictures of students so that users could vote on their relative attractiveness. Although Facemash became
increasingly popular among the students, Harvard’s administration determined that the program was
inappropriate and prohibited it from campus.

Recognizing that there was no online student directory (i.e., face book) at Harvard, Zuckerberg wrote the
code for a new website, launching “thefacebook.com” as a way to connect people in the university community.
The website allowed users to create their own profiles, communicate with other users, and upload photos,
among other features. Initially, membership in the website was limited to Harvard students. Classmates
Moskovitz, Hughes, Saverin, and McCollum joined Zuckerberg to promote the website as it quickly expanded
to Columbia, Stanford, and Yale. Zuckerberg left Harvard after his sophomore year, moved the company to
Palo Alto, California, and began devoting all his time to the new venture.

In the summer of 2004, the company received its first outside investment—$500,000 from venture
capitalist Peter Thiel, in exchange for a 10% ownership in the company; Thiel joined Facebook’s board upon
making that investment.4 By the end of 2004, Facebook had one million users. In 2005, the company expanded
beyond Ivy League institutions to other colleges, high schools, and international schools, and shortened its
name from thefacebook.com to “Facebook.”5 Through 2011, the company raised a total of $1.3 billion from
outside investors, including venture capitalists and other investment funds, Hong Kong businessman Li Ka-
Shing, Microsoft, Digital Sky Technologies, and Goldman Sachs, among others.

Toward the end of 2011, Facebook had nearly 500 shareholders (some earlier investors had sold shares to
other investors, increasing the number of shareholders as time passed), a level that would trigger a regulatory
requirement that the company publicly report its financial statements. Zuckerberg recognized that if his
company had to meet ongoing reporting requirements, it may as well go public to gain some financial benefit
from an initial public offering (IPO). Accordingly, Facebook announced it would complete an IPO, and priced
it at a level that valued the company at an estimated $104 billion. The company completed the IPO on May 18,
2012, raising $16 billion, the third-largest IPO in US history at the time.6 Since its IPO, Facebook grew
substantially. The number of users was over two billion by the end of 2017 (Exhibit 3), and the company’s
revenues had grown to $40.7 billion in 2017 (Exhibit 4).7

Jones’s Task

Jones knew that a company was directed and controlled through corporate governance, which also gave
investors some comfort in knowing that the company’s management made decisions with their best interests
in mind. She knew that she could find some information about a company’s governance in its annual proxy
statement, which must be why her manager had suggested she start by looking at that statement for Facebook.

She recalled recently receiving a proxy statement in the mail related to a company she had invested in. At
the time, she did not think it was important and tossed it aside. She never anticipated that she might find the
statement useful in her profession. She knew that a proxy statement was a document that the Securities and
Exchange Commission (SEC) required companies to provide to shareholders in advance of an annual or special

4 “Peter Thiel Sells Most of Remaining Facebook Stake,” Reuters, November 22, 2017, https://www.reuters.com/article/us-facebook-stake/peter-

thiel-sells-most-of-remaining-facebook-stake-idUSKBN1DM2BQ (accessed May 25, 2018).

5 https://newsroom.fb.com/company-info/.
6 Shayndi Raice, “Facebook Sets Historic IPO,” Wall Street Journal, February 2, 2012,
https://www.wsj.com/articles/SB10001424052970204879004577110780078310366 (accessed May 25, 2018).
7 Facebook 10-K 2012–17; https://newsroom.fb.com/company-info/.

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shareholders’ meeting.8 It contained information about ownership of the company’s stock by large
shareholders, proposals requiring shareholder vote at the meeting, members of the board of directors and their
compensation, and compensation of the company’s top executives, among other items, all of which would help
shareholders make informed decisions about the topics discussed at those meetings. Regulation 14A of the
Securities Exchange Act of 1934 required companies to file annual proxy statements; as a result, the document
was officially filed as Form DEF 14A, where “DEF” stood for “Definitive Proxy Statement.” Based on the
information Jones knew the proxy statement would contain, she felt sure she could get a pretty comprehensive
overview of corporate governance practices at Facebook. She opened her copy of Facebook’s 2017 annual
proxy statement and began reading through it.

As Jones wondered about the identity of Facebook’s largest investors, she turned to a section in the proxy
statement that included details about the stock owned by executive officers and directors, as well as by any
other shareholder owning more than 5% of the company’s stock (Exhibit 5). She noticed Zuckerberg’s name
right at the top of that table. She was a bit uncertain as to what the numbers meant, though. There were two
classes of stock—Class A and Class B. She noticed that Zuckerberg owned about 400 million shares
(8.7 million Class A shares, and 392.7 million Class B shares). He also controlled an additional 48.9 million
shares held in various trusts. According to the table, these shares gave him 53.3% of the voting power (59.9%
if one included the shares in the trusts), which surprised her because she knew from an earlier page in the proxy
statement that Facebook had about 2.9 billion shares outstanding. She wondered how Zuckerberg could have
so much voting power, and why there were two classes of shares. She also wondered why Zuckerberg didn’t
own many Class A shares, and why there were few others listed as owners of Class B shares. She searched the
proxy statement for information about the two classes of shares and found something that she thought could
help her understand the difference: “Holders of our Class A common stock are entitled to one vote for each
share held…Holders of our Class B common stock are entitled to ten votes for each share held…”9 She needed
to think about the implications. In the meantime, she compared Zuckerberg’s ownership levels and voting
power (Exhibit 6).

Jones also knew that the company’s board of directors played a critical role in corporate governance. The
board was responsible for overseeing management, determining the compensation of executives, setting
policies on dividend payments, hiring the company’s external auditors, and other important decisions. Members
of a company’s board of directors were typically elected by the company’s shareholders (i.e., owners) and as a
result, were supposed to ensure that shareholders’ interests were represented.

Jones found a list of Facebook’s board members, as well as a short biography of each of them, in the
company’s annual proxy statement (Exhibit 7). She made a note that two of the board members, Zuckerberg
and Sheryl Sandberg, were executive officers at the company, but the remaining members were not company
employees. She wondered how that might affect whether or not the board could effectively represent the
shareholders’ interests. She noticed that there were eight board members—was that enough? Too many? She
did not know.

Jones read on and found a lot of discussion on Facebook’s board (see Exhibit 8). That discussion included
information about the board’s leadership structure, and she learned that not only was Zuckerberg the CEO of
Facebook, but he was also the chairman of its board of directors. How could the CEO be the chairman of the
board when one of the roles of the board was to make sure management was making decisions in the best
interests of the shareholders? She made a note to think about that. She noticed a brief discussion about

8 The SEC requires the filing of a proxy statement whenever votes are solicited from shareholders by any company whose securities are registered

under Section 12 of the Securities Exchange Act of 1934, meaning any company whose securities are listed on a national securities exchange or that has
assets totaling more than $10 million and a certain number of shareholders (see SEC Financial Reporting Series: 2017 Proxy Statements—An Overview of the
Requirements and Observations about Current Practice, Ernst & Young LLP, 2016).
9 Facebook, Inc., 2017 Annual Proxy Statement, 6.

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“controlled company status,” “director independence,” and “classified board,” terms she had not heard before,
and she read through that information. She knew it would be important for her to reflect on each of these
characteristics and their implications for how well the board could represent the interests of the shareholders.
She found all of this absolutely fascinating, and couldn’t believe her good luck in landing this project as one of
her first assignments.

Being a member of Facebook’s board seemed like it might be a big job. She wondered how much board
members were paid; after turning a couple of pages, she realized that information was included in the proxy
statement (Exhibit 9). Jones also noticed a long section in the proxy statement related to executive
compensation. She had to pause for a few moments to consider why this information was disclosed in the
proxy statement and how it might relate to corporate governance. She focused on several different subsections.
There was information about the board’s philosophy on and objectives for executive compensation
(Exhibit 10), including different forms of compensation. The board seemed intent on providing some
performance incentives, and it also wanted to consider compensation of executives in a “peer group” of
companies when setting compensation for Facebook executives. She wondered whether these were positive
features when it came to corporate governance.

Jones just could not put the proxy statement down. She realized that not only could she tell how much
money Facebook’s top executives made in 2017, but she could see what types of compensation they received
(Exhibit 11). She wondered why the company did not just pay each executive a big salary and leave it at that.
Then she noticed that Zuckerberg’s compensation was the lowest of all executives listed in the table. She also
noticed that the median total annual compensation for a full-time employee was $240,430. She wondered about
the governance implications of a workforce with so many highly educated and skilled employees. She could see
the stock options and restricted stock granted to each executive during 2017 (Exhibit 12), the stock options
and restricted stock each executive had outstanding at the end of 2017 (Exhibit 13), and the options exercised
by and restricted stock vested for each executive during 2017 (Exhibit 14). She noticed that Zuckerberg had
received no stock options or restricted stock grants during 2017, had no options or restricted stock outstanding
at year-end, and had not exercised any options or had any restricted stock vested during the year. She wondered
why. She also noticed that the numbers for the other executives in the table were large in comparison, and she
wondered what would happen to those options or shares of restricted stock if an executive left the company.

Next Steps

As Jones finished paging through the proxy statement, she recalled that Zuckerberg had been sued for
allegedly stealing the idea for creating Facebook.10 She could not recall the details of the case, but it gave her
pause to think that Zuckerberg controlled one of the largest companies in the world. On the other hand, Jones
also remembered that Zuckerberg and his wife had pledged to donate 99% of their Facebook shares to charity,
which made her feel a bit better about the company.11

It would be a long week. She was fascinated by what she had read and eager to put together a polished,
high-quality, insightful report for her first assignment. It was a good thing she had learned to love coffee.

10 The parties settled the case in 2008, with Tyler and Cameron Winklevoss being awarded an estimated $65 million comprised of $20 million in cash

and the remainder in Facebook stock. See Daniel Ionescu, “Winklevoss Twins v. Facebook: Case Closed,” PCWorld, April 12, 2011,
https://www.pcworld.com/article/224933/Winklevoss_Twins_v_Facebook_Case_Closed.html (accessed May 25, 2018).
11 Yasmeen Abutaleb, “Facebook’s CEO and Wife to Give 99 Percent of Shares to Their New Foundation,” Reuters, December 1, 2015,

https://www.reuters.com/article/us-markzuckerberg-baby/facebooks-ceo-commits-99-percent-of-shares-to-new-equality-initiative-
idUSKBN0TK5UG20151202 (accessed May 25, 2018).

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Exhibit 1
Facebook, Inc.: A Look at Corporate Governance
Consolidated Balance Sheets

Source: Facebook 2017 10-K.

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Exhibit 2
Facebook, Inc.: A Look at Corporate Governance
Consolidated Statements of Income

Source: Facebook 2017 10-K.

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Exhibit 3
Facebook, Inc.: A Look at Corporate Governance
Number of Users by Year

Number of Users,
2004–17
(in millions)
 2,500

 2,000

 1,500

 1,000

500

‐
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Data source: Facebook 10-K.

Exhibit 4
Facebook, Inc.: A Look at Corporate Governance
Assets and Revenues by Year Since IPO

Assets and Revenues
(2010–17)
 $90,000
 $80,000
 $70,000
 $60,000 IPO
 $50,000
 $40,000
 $30,000
 $20,000
$10,000
$‐
2010 2011 2012 2013 2014 2015 2016 2017

assets revenues

Data source: Facebook 10-K.

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Exhibit 5
Facebook, Inc.: A Look at Corporate Governance
Security Ownership of Certain Beneficial Owners and Management

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Exhibit 5 (continued)

Security Ownership of Certain Beneficial Owners and Management

Source: Facebook, Inc., 2017 Annual Proxy Statement, 37–38.

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Exhibit 6
Facebook, Inc.: A Look at Corporate Governance
Proportion of Voting Power Held by Mark Zuckerberg

Zuckerberg's
Ownership v. Control
70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
% of voting power % of total shares owned

Data source: Facebook, Inc., 2017 Annual Proxy Statement.

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Exhibit 7
Facebook, Inc.: A Look at Corporate Governance
Facebook Board of Directors

Name Age Position

Mark Zuckerberg 33 Chairman and CEO

Sheryl K. Sandberg 48 Chief Operating Officer and Director
Marc L. Andreessen(1)(2) 46 Director
Erskine B. Bowles(1) 72 Director
Kenneth I. Chenault 66 Director
Susan D. Desmond-Hellman*(1) 60 Director
Reed Hastings(2) 57 Director
Jan Koum 42 Director
Peter A. Thiel(2) 50 Director

* Lead Independent Director

(1) Member of the audit committee
(2) Member of the compensation & governance committee

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Exhibit 7 (continued)

Facebook Board of Directors

Source: Facebook, Inc., 2017 Annual Proxy Statement, 10–12.

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Exhibit 8
Facebook, Inc.: A Look at Corporate Governance
Additional Information About the Board of Directors

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Exhibit 8 (continued)

Additional Information About the Board of Directors

Source: Facebook, Inc., 2017 Annual Proxy Statement, 12–14.

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Exhibit 9
Facebook, Inc.: A Look at Corporate Governance
2017 Director Compensation

Source: Facebook, Inc., 2017 Annual Proxy Statement, 17.

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Exhibit 10
Facebook, Inc.: A Look at Corporate Governance
Excerpt from Compensation Discussion and Analysis Section of 2017 Proxy Statement

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Exhibit 10 (continued)

Excerpt from Compensation Discussion and Analysis Section of 2017 Proxy Statement

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Exhibit 10 (continued)

Excerpt from Compensation Discussion and Analysis Section of 2017 Proxy Statement

Source: Facebook, Inc., 2017 Annual Proxy Statement, 19–21.

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Exhibit 11
Facebook, Inc.: A Look at Corporate Governance
2017 Summary Compensation Table

Source: Facebook, Inc., 2017 Annual Proxy Statement, 28.

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Exhibit 12
Facebook, Inc.: A Look at Corporate Governance
2017 Grants of Restricted Stock and Stock Options

Source: Facebook, Inc., 2017 Annual Proxy Statement, 29.

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Exhibit 13
Facebook, Inc.: A Look at Corporate Governance
2017 Outstanding Equity Awards at Year-End

Note: Footnotes (1)–(30) omitted.

Source: Facebook, Inc., 2017 Annual Proxy Statement, 29–30.

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Exhibit 14
Facebook, Inc.: A Look at Corporate Governance
2017 Option Exercises and Stock Vested

Source: Facebook, Inc., 2017 Annual Proxy Statement, 31–32.

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