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El-Erian: Facebook Highlights Importance of Public Markets

Media sources reported on Friday that Facebook's founder, Mark Zuckerberg, had held staff meetings, including a company-wide gathering earlier this month, to counter sagging morale caused by the sharp drop in the company's stock.

Facebook IPO
Emmanuel Dunand | AFP | Getty Images
Facebook IPO

In the process — and I suspect inadvertently — Mr. Zuckerberg reminded us of the important role that public markets play in today's complex global economy. And we should all be grateful to him given the extent to which some politicians have taken to generalized market bashing. (Related: Facebook Now the Worst Performing Stock in Past 3 Months.)

By going public in a highly-watched IPO last May, Facebook illustrated two important functions of public markets: First, they allow companies to raise capital that is both "permanent" and non-debt creating, thus mobilizing the best funding for productive expansion; and second, they provide a monetization mechanism for founding management and staff, thereby incentivizing and rewarding successful entrepreneurship and risk-taking.

But public markets do much more than that. They also act as an important reality check, supplying management and staff with information that may be critical for sustaining innovation and success.

Prior to going public, there seemed to be no limit to Facebook's mystique and charisma; and no end to its ability to meet needs that many did not even realize they had.

Facebook was the kind of disruptor that does not come around very often.

It singlehandedly pushed out the frontiers of social media, creating and sustaining a phenomenon that many people, in virtually every country around the world, wished to be part of.

Facebook was the hip employer, promising its staff innovation, status, wealth and a sense of mission. And, if all this was not enough, it was also redefining how businesses, governments and individuals interact.

For many, Facebook could do no wrong.

With this amazing aura, Facebook management and staff would have been easily forgiven for growing over-confident eventually and ultimately complacent. Indeed, given the company's rather restricted information-dissemination policy, few on the outside could have credibly challenged its achievements and ambitions.

The IPO changed all this. Suddenly, hundreds of analysts and observers were dissecting every bit of company information. Virtually every comment made by Mr. Zuckerberg and his talented colleagues was scrutinized for content and signals. And numerous attempts were made to link his plans and vision to a potential net revenue stream and a range for the company's shares. (Related: Facebook 'Close to Being Extremely Attractive': Pro.)

Facebook's mystique and the related sense that it could do no wrong were replaced by the brutal reality of analyst's calls and downgrades. The stock quickly traded down from its hyped IPO level which, as I noted on the second day of trading, had sucked in too many unsuspecting investors.

In all this, the company's standing and its credibility have taken a material hit that, only a few months ago, would have been deemed not just unlikely but unthinkable. No wonder some suspect that morale at Facebook is low; and no wonder Mr. Zuckerberg felt it necessary, according to media reports, to address his company's stock decline which, according to a Wall Street Journal article, he deemed "painful" for some employees.

Ironically, all this may actually be good for Facebook in the long run.

Every successful company requires periodic reality checks which, in many cases, lead to beneficial course corrections. Indeed, the most successful companies do their utmost to hardwire as many reliable checks and balances as possible.

Yesterday's Facebook mystique has given way to a very public stock market debacle. Yet if the signals involved are well internalized by management and staff, Facebook could well avoid what could have been an even bigger reality shock down the road. (Related: Accel Unloads Facebook on Its Own Investors: Sources.)

In the process, the company will help send a message to all those politicians who are way too eager to broad-brush public markets as a whole with the spectacular failures of a few segments. Well-functioning markets have played, and will continue to play, a critical role in maintaining the entrepreneurship and discipline that are essential to America's traditional vibrancy, its power of invention and innovation, and its global competitiveness.

Mohamed El-Erian is the CEO and Co-CIO of PIMCO, which oversees nearly $1.8 trillion in assets and runs the Pimco Total Return Fund, the largest bond fund in the world. His book, "When Markets Collide," was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year and was named a book of the year by The Economist and one of the best business books of all time by the Independent (UK).