Facebook IPO mess highlights board problems

(MoneyWatch) Facebook's (FB) initial public offering, dogged by questions even before it launched, is beginning to stink. Regulators are looking into whether lead underwriter Morgan Stanley (MS) selectively informed certain clients of a change in the social networker's revenue forecast in the days leading up to its $16 billion IPO. Shareholder lawsuits are flying, as commonly happens when a major company's stock price suddenly drops like a stone.

No surprise, perhaps, that Facebook CFO David Ebersman appears to have been thrown under the bus. News coverage of the company's rocky IPO and the weak initial performance of its stock price has focused on the executive's role in the offering, implying that he and Morgan Stanley mismanaged the transaction.

But here's why the buck doesn't end with Ebersman: Facebook CEO Mark Zuckerberg runs the Internet company as if he owned it. Although as a public concern Facebook is now owned by shareholders, its dual-class share structure gives Zuckerberg majority control of the voting stock. So whatever mistakes Ebersman may have made in preparing for the IPO, it is Zuckerberg who ultimately bears responsibility.

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Zuckerberg's tight rein over Facebook is reflected in the company's board of directors. He is not only CEO of Facebook, but also chairman, a dual role that corporate governance experts criticize as concentrating too much power in a chief executive's hands. The company's seven-member board also is packed with people close to Facebook, suggesting that it may lack the necessary independence and influence over Zuckerberg to fulfill its fiduciary duty to shareholders.

Take Erskine Bowles, the former White House Chief of Staff in the Clinton administration and more recently a member of President Obama's fiscal deficit commission. Bowles, a former Morgan Stanley executive, also currently sits on the investment bank's board.

It is a conflict of interest for Bowles to represent Facebook shareholders while also representing a company that helped shepherd the company to the public market. Why? Because as the mounting controversy over Morgan Stanley shows, an underwriter's financial interests may not align -- in fact, often directly clash -- with those of common shareholders. 

Questions about Facebook's board also recently surfaced after the company bought photo-sharing service Instagram for roughly $1 billion. Reports following the deal suggested that Zuckerberg informed directors of the acquisition only after it had already been clinched. Although Facebook was not yet public at the time, such unilateral decision-making raises fundamental questions about the company's management, and may give pause to investors.

Zuckerberg has also drawn fire for Facebook's repeatedly changing the site's features, layout, privacy policy, and other elements without always consulting the company's users. That is perhaps less troubling, with companies routinely changing their products and services without seeking feedback from customers. But it may reinforce the perception that Zuckerberg treats Facebook as his personal fiefdom, rather a publicly held company in which management acts as a steward of shareholder value. 

In some ways, questions regarding Facebook's governance are separate than considerations of its financial prospects. There is no questioning the company's promise. Yet its management, including the efficacy of its board, its clearly critical in trying to assess whether Facebook will ever deliver on that promise. 

It is early days for Facebook as a public entity. Many other companies have stumbled as they entered the spotlight. But few have been freighted with the outsized expectations that Facebook carries. That makes Zuckerberg's margin for error a narrow one.