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Facebook's board is too deferential to Mark Zuckerberg, says lawyer who fought stock plan

Key Points
  • Mark Zuckerberg's "biggest weakness" is a board that lacks diversity, says an attorney who recently deposed him in a lawsuit.
  • Their uniformity of experience has led to a consensus of opinion that defers to Zuckerberg on all matters, says Stuart Grant.
  • That dynamic works to the company's disadvantage when it faces challenges outside of Zuckerberg's area of expertise as a technologist and business owner, Grant argues.

Mark Zuckerberg speaks during the Asia-Pacific Economic Cooperation (APEC) 2016 CEO Summit in Lima, Peru.
Bloomberg | Getty Images

The attorney who helped a group of Facebook shareholders sue to stop Mark Zuckerberg's plan to reclassify the company's shares says the CEO's "biggest weakness" is a board that lacks diversity.

"He's surrounded himself with people just like him -- Silicon Valley entrepreneurs," says Stuart Grant, who deposed the Facebook founder during a lawsuit filed by investors opposed to the company's proposal. Facebook withdrew the proposal last month, just days before Zuckerberg was set to testify in the suit in Delaware Chancery Court.

Facebook's board is mostly composed of directors who have either founded or served as top officers for well-known technology companies, including Marc Andreessen, who co-founded Netscape; Peter Thiel, who co-founded PayPal; Reed Hastings, CEO of Netflix; and Jan Koum, co-founder of WhatsApp (now a unit of Facebook).

Other board members are Erskine Bowles, Susan Desmond-Hellman, former president of product development at Genentech, Zuckerberg himself, and Facebook COO Sheryl Sandberg.

"There's a reason for diversity -- it gives you a mix of opinions and ideas," says Grant, partner and co-founder of Grant & Eisenhofer, a Wilmington, Delaware, firm that specializes in securities and corporate-governance cases.

The board's near-uniformity of experience has led to a consensus of opinion that defers to Zuckerberg on all matters, Grant told CNBC. That can stray from what is best for shareholders.

For example, allowing Zuckerberg to reduce his economic interest in Facebook "dramatically" -- by selling tens of millions of shares -- while allowing him to maintain "absolute control" over corporate decision-making was a bad idea that the board should have voted down, Grant argues.

"You never want to divide economic consequences from decision-making," he says.

Zuckerberg's plan would have created three classes of shares, one with no voting rights, and allowed him to maintain voting control of the company even after selling most of his stake.

Recently unsealed legal briefs prepared for the suit show that Bowles and Desmond-Hellman --the two outside board members who did not lead or found tech companies -- raised the most concerns about the share-reclassification.

Bowles and Desmond-Hellman, along with Andreessen, were members of the special committee responsible for vetting Zuckerberg's proposal.

Andreessen, however, worked behind the scenes to convince other board members to grant Zuckerberg what he sought, according to the briefs.

During the deposition process, Grant says, Zuckerberg pointed out that his decision-making power has worked in the company's interests, as when Facebook was able to acquire companies, such as Instagram and WhatsApp, quickly, as rivals also sought to buy them.

Indeed, Facebook's shares have soared along with its sales and profits since its initial public offering in 2013, enriching those shareholders who've bet on Zuckerberg's leadership.

Yet "that works until it doesn't," Grant told CNBC. "Having a benevolent dictator may be the best way to run a company -- until it's not." That's because no CEO has expertise in all areas and therefore "needs people to supplement" their thinking.

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