Facebook in 2018 = GM in 1992

Many readers know I covered the auto industry through the 1990s, and Facebook today reminds me a lot of General Motors circa 1992. Hard to believe, perhaps, but GM was a blue chip stock at the time. It had weathered the 1990-1991 downturn with an A credit rating and while it wasn’t in as dominant of a position as FB is today, management felt pretty sure of themselves. Until, of course, a surprise 1992 board revolt led by outside director John Smale put in place a new management team.

The problem for GM then was profitability; Facebook’s issue now is user trust and the very real threat of regulation. The common linkage is corporate governance in the form of board intervention. Where the story parts ways is the effects Facebook’s performance has on investors.

Four quick points tell the whole story.

#1: “Only good news”. Several press accounts relay that this is the nickname for Sheryl Sandberg’s conference room at FB headquarters. This is not good news for investors, and I can assure you GM’s pre-1992 management team had the same predilection to tune out the negative.

If you haven’t read it yet, Wired magazine’s cover article on Facebook describes the company’s managerial challenges very well: https://www.wired.com/story/inside-facebook-mark-zuckerberg-2-years-of-hell/

#2 Facebook’s Board. During the GM board revolt, the company split the Chairman and CEO roles for the first time in the company’s history. This allowed Jack Smith, the new CEO, to focus on a turnaround and made him accountable to the Chair to deliver on those plans.

Mark Zuckerberg holds both positions at Facebook, something that corporate governance experts strongly dislike. In addition, there are two other insiders on the FB board: Sandberg and Jan Koum (the co founder of WhatsApp, which FB purchased in 2014). The outside directors are:

  • Marc Andreessen. VC Investor
  • Erskine Bowles. DC insider, private investor, corporate advisor and, notably, a former General Motors board member (2005 – 2009)
  • Ken Chenault. Former Chair and CEO of American Express
  • Susan Desmond-Hellman. Former senior Genentech exec and current CEO of The Gates Foundation. Importantly, she is the current lead outside director for Facebook.
  • Reed Hastings. Chair and CEO of Netflix
  • Peter Thiel. VC investor

One or more of these directors need to step up, but who will it be? The board seems to suffer from three faults. First, many members hail from the tech world and may not want to be “That guy/gal” who agitates for change. Second, many are current or former CEOs themselves, and may tend to give current management a longer runway than they deserve. Lastly, a third of them are employees.

#3. Facebook weightings in US Equity Technology/Growth Indices and ETFs.Facebook is only 1.9% of the S&P 500, but it has a much larger weight in popular tech and growth stock indices. FB is:

  • 6.8% of the S&P 500 Technology Sector Index
  • 5.5% of the NASDAQ 100 Index
  • 3.5% of the S&P 500 Growth Stock Index
  • 3.2% of the Russell 1000 Growth Stock Index

Worth noting: these are very popular index types in the world of US listed ETF. According to data from www.xtf.com, there are $85 billion of ETF assets under management dedicated to Tech shares, and $177 billion allocated to US growth stocks.

Bottom line: Facebook’s performance touches a lot of corners of the US equity market, making its success of great interest to a wide array of investors.

#4. Some good news for Sandberg’s conference room. While Facebook’s user engagement was lower in the US in the fourth quarter than the third, there are no signs that customers are yet giving up on the service. A few data points here:

  • Google search trends for the phrase “Delete Facebook” are stable over the past 12 months and down by 40% since the peak of the last 5 years.
  • Search volumes for phrases such as “Cancel Facebook” and “get rid of Facebook” show similar trends.
  • The states with the highest interest for “Delete Facebook” are West Virginia, Kentucky and Mississippi. Populous states are all near the bottom of the list: New York (45th), California (42nd), and Texas (35th).

The upshot to these four points is that Facebook is now a bit of a workout story, one where investors will expect to see some change at the top before they regain faith in management.

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