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Dear Mr. Zuckerberg: Please Ignore Your Critics

Monday, 20 Aug 2012 | 3:45 PM ET
Mark Zuckerberg
David Paul Morris | Bloomberg | Getty Images
Mark Zuckerberg

Dear Mr. Zuckerberg,

You've probably noticed that the decline in Facebook's share price has been accompanied by a rise in criticism of your role at the company.

Monday morning, "USA Today" said that speculating about your job status has become a "parlour game" in Silicon Valley.

It's very possible none of this bothers you. Why should it? You set up the company so that you would have control of it regardless of what major shareholders want. You made it very clear to the public that was buying shares in Facebook that you would completely dominate the company. None of this was contingent on short-term stock performance. There was no promise that you'd step aside if the stock plummeted. (Related: Morningstar analyst says Facebook Near 'Extremely Attractive’)

Self-styled experts in corporate governance are hoping to make an example out of you.

They want to present you as the model of the downsides of rejecting expert opinion about corporate governance. They very deeply believe that shareholders need more of a say in how corporations are run, and that regulations have a strong role to play in giving more power to shareholders. You squarely rejected these ideas with your IPO and so they are practically salivating at the criticism being directed to you.

Here's the thing, Mr. Zuckerberg. These people have no evidence on their side. There is no reason to suppose Facebook shares would perform better if shareholders were able to oust you. In fact, if shareholders did oust you, its almost certain Facebook would perform far worse.

Almost all of the evidence, in fact, is on your side. As I wrote before the IPO:

A 2007 study by Rüdiger Fahlenbrach, of Ecole Polytechnique Fédérale de Lausanne and the Swiss Finance Institute, looked at 11 percent of the largest public U.S. firms headed by a CEO who founded the firm. What the study found is that founder CEO firms have shockingly high returns when compared to relevant benchmarks. An value-weighted portfolio of CEO dominated firms would outperform by 10.7 percent, while an equal weighted portfolio would outperform 8.6 percent, the study showed.

“Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions,” Fahlenbrach found.

A study by a pair of Italian economists found similar results that challenged the idea that shareholders should be wary of these companies.

“Valuation and operating performance are significantly higher in founder-controlled corporations,” Roberto Barontini and Lorenzo Caprio concluded after looking at data from 675 publicly traded corporations in 11 European countries.

A study published in the Journal of Corporate Finance in 2008 looked at 275 German exchange-listed companies. It found that founder-run and founder-dominated firms are more profitable than widely held firms.

Founders even outperform professional chief executive types.

According to a study in the Journal of Business Venturing, founder CEOs tend to earn smaller incentive compensation and smaller total compensation than professional CEOs — suggesting that they are less likely to abuse their position by self-dealing. Zuckerberg, for example, has not been paying himself very much as CEO of Facebook. And next year he’s taking compensation of just one dollar.

“Founder-managed firms are associated with higher financial performance and are more likely to survive than professional-managed firms. Firms with founder-CEOs are associated with even higher financial performance when the position of CEO and chairperson of the board is combined,” the study concludes.

In short, Mr. Zuckerberg, your critics are only pretending to know that the company would perform better if you replaced yourself with a "professional" CEO. There's no reason to suppose this is true and plenty of evidence to indicate that it isn't. (See: You’ll Regret Not Buying Facebook, Right Now: Pro)

Stay strong, Mr. Zuckerberg. Ignore your critics. Keep leading Facebook.

Best,

John Carney

P.S.: Do people actually call you Mr. Zuckerberg? If you had a dry cleaner, I bet he'd call you Mr. Zuckerberg. My dry cleaner calls me Mr. Carney, even though almost no one else does. But you probably don't know your dry cleaner, so this might not be relevant to you.

"The New York Times" calls you Mr. Zuckerberg. But they call all males of the species by "Mister so-and-so."

- by CNBC.com senior editor John Carney

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